Political Economy of Regional Integration in Sub-Saharan Africa Edited by Paul Brenton and Barak Hoffman Political Economy of Regional Integration in Sub-Saharan Africa Edited by Paul Brenton and Barak Hoffman Acknowledgements We would like to thank Colin Bruce and Andrew Roberts for their support for this project. We would also like to thank our reviewers, Olivier Hartmann, Charles Kunaka, John Nash, Sebastian Saez, and Smita Wagh. We further express appreciation to Mariama Daifour Ba and Mariame Koita for their administrative support. Vicky Baumann, Cindy Hass, and Julie Kinsella at Shepherd, Inc. provided excellent editorial and graphic design assistance. This work was funded by the Multi-Donor Trust Fund for Trade and Development supported by the govern- ments of the Netherlands, Norway, Sweden, Switzerland, and the United Kingdom. The views expressed in this report reflect solely those of the authors and not necessarily the views of the funders, the World Bank Group or its Executive Directors.  iii Contents Chapter 1: Political Economy of Regional Integration in Sub-Saharan Africa: A Summary by Paul Brenton and Barak Hoffman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 2. Paths to Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 3. Political Economy of Regional Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  3 3.1. Strong Private Sector Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  3 3.2. Lead Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  5 3.3. Number of Actors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7 4. A Comparative Analysis of Africa’s Regional Integration . . . . . . . . . . . . . . . . . . . . . . . .  8 5. Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10 Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa by Johan Swinnen and Emma Janssen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13 2. Regional Trade Agreements in Sub-Saharan Africa: The Literature . . . . . . . . . . . . .  14 3. Observations and Stylized Facts on Agricultural and Trade Policies in SSA and RTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17 3.1. Variations among RTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18 3.2. Import—Competing versus Exportable Commodities . . . . . . . . . . . . . . . . . . . . .  18 3.3. Staple Foods versus Other Agricultural Commodities . . . . . . . . . . . . . . . . . . . . . .  19 3.4. Declining Import Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20 3.5. Increased Export Constraints since 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20 3.6. Input Subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  20 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  21 4. Political Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  25 4.1. Anti-Trade Bias and Variations in Taxation to Commodity Groups . . . . . . . . . . .  25 4.2. Political Economy of Reduced Trade Distortions 1985–2005 . . . . . . . . . . . . . . .  26 4.3. Political Equilibria in Times of High and Volatile Food Prices 2005–2013 . . . . .  29 4.4. Regional Trade Agreements: Balancing Commitments and Flexibility . . . . . . . .  30 5. Liberalization, Value Chains, Prices, and Agricultural Performance in Africa . . . . .  32 5.1. Liberalization and Performance in SSA Agriculture . . . . . . . . . . . . . . . . . . . . . . . .  32 5.2. A Value Chain Perspective on Staple Food Performance . . . . . . . . . . . . . . . . . . .  33 5.3. Food Price Increases, Trade, and Performance . . . . . . . . . . . . . . . . . . . . . . . . . . .  34 iv Political economy of regional integration in sub-saharan africa 6. The Role of Non-Tariff Measures and Informal Trade . . . . . . . . . . . . . . . . . . . . . . . . .  36 6.1. Non-Tariff Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  36 6.2. Informal Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  38 6.3. Trade Constraints for Inputs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  38 7. Conclusions and Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  39 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  44 Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community by Leonardo Arriola and Jared Osoro . . . . . . . . . . . . . . .  49 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  49 2. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  50 2.1. Regional Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  50 2.2. Macroeconomic Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  51 3. The Financial System in the EAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  54 3.1. Financial Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  54 3.2. Banking Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  54 3.3. Banking Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  61 3.4. Nonbank Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  61 4. Cross-Border Banking Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  64 4.1. Expansion Patterns and Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  64 4.2. Host Country Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  66 5. Toward Greater Financial Integration in the EAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  68 5.1. The EAC Monetary Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  68 5.2. The Optimal Currency Area Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  68 5.3. The Institutional and Political Challenges to Regional Integration . . . . . . . . . . . .  69 5.4. Empowering the EAC Secretariat . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  71 6. Persistent Policy Divergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  73 7. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  76 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  76 Chapter 4: Political Economy of Trade in Professional Services in the EAC by Nora Dihel and Michael Jelenic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  79 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  79 2. Professional Services in East Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  79 3. The Political Economy of Trade in Services: A Theoretical Approach . . . . . . . . . . . .  81 3.1. Domestic Level Political Economy Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  83 3.2. Regional Political Economy Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  84 v 4. Applied Political Economy Analysis: A Sectoral Perspective . . . . . . . . . . . . . . . . . . . .  85 4.1. Institutional and Stakeholder Mapping at the Sectoral Level . . . . . . . . . . . . . . . .  87 4.2. Accounting and Auditing—Institutional and Stakeholder Mapping . . . . . . . . . .  87 4.3. Legal Services—Institutional and Stakeholder Mapping . . . . . . . . . . . . . . . . . . . .  88 4.4. Engineering/Architecture—Institutional and Stakeholder Mapping . . . . . . . . . .  90 5. Applied Political Economy Analysis: A Problem-Driven Perspective . . . . . . . . . . . . .  94 5.1. Educational Issues and Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  94 5.2. Domestic Regulatory Issues and Constraints . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  96 5.3. Trade Barriers and Labor Mobility Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . .  98 5.4. Liberalization and Regulatory Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  99 6. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  100 Annex 1 Conceptual Issues: Regulatory Measures Affecting Professional Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  101 Education Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  102 Domestic Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  102 Explicit Trade Barriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  104 Immigration Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  105 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  105 Chapter 5: The Political Economy of Trade Facilitation in Eastern and Southern Africa by Robert Kirk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  107 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  107 2. Characteristics of Trade Facilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  108 3. Approaching the Political Economy of Trade Facilitation . . . . . . . . . . . . . . . . . . . . .  109 4. Case Studies of Trade Facilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  111 4.1. Trade Facilitation in the East African Community . . . . . . . . . . . . . . . . . . . . . . . . .  112 4.2. Mapping the Actors: Interests, Motivations, Incentives, and Pressures . . . . . .  113 4.3. Regional Customs Bond Guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  115 4.4. Border Management Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  117 4.5. Quality Infrastructure and Technical Barriers to Trade . . . . . . . . . . . . . . . . . . . .  118 5. Key Findings and Recommendation for Further Work . . . . . . . . . . . . . . . . . . . . . . . .  122 5.1. Ensure Ownership for Trade Facilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  122 5.2. Learn from Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  123 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  123 Chapter 6: Political Economy of Transport Sector Integration in the East African Community by Barak Hoffman and George Kidenda . . . . . . . . . .  125 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  125 vi Political economy of regional integration in sub-saharan africa 2. EAC Transport Sector Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  125 2.1. Road Transport. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  126 2.2. Rail Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  126 2.3. Ports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  127 2.4. Inland Water Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  129 3. Overview of the EAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  129 4. Development of Transport Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  131 4.1. Historical Evolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  131 4.2. Contemporary Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  132 5. Successes in Overcoming Integration Barriers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  133 5.1. Regulatory Harmonization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  133 5.2. Border Crossings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  135 5.3. Road Conditions and Transit Times . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  136 5.4. Implementation of the East African Single Customs Territory . . . . . . . . . . . . . .  136 5.5. Business Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  136 5.6. Data and Transparency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  137 6. Structure of the Transport Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  137 6.1. Firm Profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  138 6.2. Determinants of Road Transport Costs and Prices in East Africa . . . . . . . . . . .  139 7. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  142 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  143 Appendix: Transport Sector Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  144 EAC Transport Sector Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  144 List of Boxes, Figures, and Tables BOX 1: Country Coverage of RRA/NRA by Regional Trade Agreement . . . . . . . . . . . . . . .  16 BOX 2: Problem-Driven Political Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  82 BOX 3: Key Activity Areas In Trade Facilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  114 BOX 4: Steps and Costs to Make a Container from Mombasa to Uganda . . . . . . . . . . .  139 FIGURE 1: Global Food Price Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  14 FIGURE 2: Real Rate of Assistance to Agriculture (RRA) in SSA (Actual Numbers and Smoothed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18 FIGURE 3: Real Rate of Assistance to Agriculture (RRA) by Regional Trade Agreement (RTA) (Actual Numbers and Smoothed) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  19 FIGURE 4: Nominal Rate of Assistance to Agriculture (NRA) by Commodity Groups . . . 21 vii FIGURE 5: Nominal Rate of Assistance to Agriculture (NRA) by RTAs and Commodity Groups—Actual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  22 FIGURE 6: Nominal Rate of Assistance to Agriculture (NRA) by RTAs and Commodity Groups—Smoothed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  23 FIGURE 7: Applied Weighted Mean Tariffs for Primary Products for SSA and by RTA . . . .  24 FIGURE 8: Food Price Policies of African Countries and the Rest of the World . . . . . . . . .  25 FIGURE 9: Agricultural Exports from SSA, 1990–2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  33 FIGURE 10: SPS Notifications at the WTO (1995–2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . .  37 FIGURE 11: Nominal GDP in the East African Community . . . . . . . . . . . . . . . . . . . . . . . . . .  51 FIGURE 12: Real GDP Growth in the East African Community . . . . . . . . . . . . . . . . . . . . . .  51 FIGURE 13: GDP Per Capita in the East African Community . . . . . . . . . . . . . . . . . . . . . . . .  52 FIGURE 14: Inflation in the East African Community . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  52 FIGURE 15: Current Account Deficit in the East African Community . . . . . . . . . . . . . . . . .  53 FIGURE 16: Investment and Savings in the East African Community . . . . . . . . . . . . . . . . .  53 FIGURE 17: Foreign Direct Investment in the East African Community . . . . . . . . . . . . . . .  53 FIGURE 18: Kenya’s Trade with the East African Community . . . . . . . . . . . . . . . . . . . . . . .  54 FIGURE 19: Financial Depth in the East African Community: M2/GDP . . . . . . . . . . . . . . .  55 FIGURE 20: Financial Intermediation in the East African Community: Private Credit/GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  56 FIGURE 21: Bank Assets in the East African Community . . . . . . . . . . . . . . . . . . . . . . . . . . .  56 FIGURE 22: Banking Sector Concentration in the East African Community . . . . . . . . . . .  57 FIGURE 23: Lerner Index in the East African Community . . . . . . . . . . . . . . . . . . . . . . . . . .  57 FIGURE 24: Return on Assets in the East African Community . . . . . . . . . . . . . . . . . . . . . . .  58 FIGURE 25: Return on Equity in the East African Community . . . . . . . . . . . . . . . . . . . . . . .  59 FIGURE 26: Bank Lending-Deposit Spread in the East African Community . . . . . . . . . . .  59 FIGURE 27: Intermediation in the East African Community . . . . . . . . . . . . . . . . . . . . . . . . .  60 FIGURE 28: Composition of Commercial Banking Assets in the EAC, 2008–2012 . . . . . .  60 FIGURE 29: Credit to Government and State Enterprises in the East African Community . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  61 FIGURE 30: Access to Banking: Bank Accounts per 1,000 . . . . . . . . . . . . . . . . . . . . . . . . . .  62 FIGURE 31: Access to Banking: Bank Branches per 100,000 . . . . . . . . . . . . . . . . . . . . . . .  62 FIGURE 32: Access to Banking: ATMs per 100,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  63 FIGURE 33: Foreign Banks in the EAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  66 FIGURE 34: Foreign Bank Assets (% Total Bank Assets) . . . . . . . . . . . . . . . . . . . . . . . . . . . .  67 FIGURE 35: EAC Budget and Funding Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  72 FIGURE 36: Financial Openness in EAC Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  74 FIGURE 37: Depth of Credit Information in EAC Countries . . . . . . . . . . . . . . . . . . . . . . . . .  75 FIGURE 38: Quality of Paved Road Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  126 viii Political economy of regional integration in sub-saharan africa FIGURE 39: Length of Road Network in East Africa (KM) . . . . . . . . . . . . . . . . . . . . . . . . . .  126 FIGURE 40: Kenya Freight Volumes by Rail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  127 FIGURE 41: Port Volumes in Dar es Salaam and Mombasa: 2001–2013 . . . . . . . . . . . .  127 FIGURE 42: Average Ship Turn-Around Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  129 TABLE 1: Growth of Gross Agricultural Output (GAO) between 1990 and 2012 for SSA as a Whole and for the 4 Different RTAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32 TABLE 2: Agricultural Output and Labor Productivity (Average Annual Growth %) . . . . .  34 TABLE 3: Growth of Imports, Production, Area, and Productivity of Cereals, 1990–2011 (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  35 TABLE 4: Non-Tariff Barriers (NTBs) as a Percentage of Total Transfer Costs . . . . . . . . . .  37 TABLE 5: Selected Capital Markets Indicators in East Africa (December 2012) . . . . . . . .  63 TABLE 6: Kenyan Commercial Banks Operating Across East Africa (December 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  65 TABLE 7: Integrated Political Economy Framework for Regional Services Trade . . . . . . .  86 TABLE 8: Accounting/Auditing Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  89 TABLE 9: Legal Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  91 TABLE 10: Engineering/Architecture Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  93 TABLE 11: Actors Involved in Trade Facilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  110 TABLE 12: Examples of Complementarity between WCO Revised Kyoto Convention and WTO Trade Facilitation Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  112 TABLE 13: Rankings on Logistics Performance Index, 2007–2014 and Doing Business Indicators for 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  113 TABLE 14: Mapping of Incentives of Key Public Agency Actors in Trade Facilitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  116 TABLE 15: Participation on the East African Standards Committee Meeting June 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  119 TABLE 16: Illustrative Mapping of Incentives of Key Actors in the National Quality Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  121 TABLE 17: Number of Trucks in the EAC: 2000–2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . .  126 TABLE 18: Cargo Traffic at Dar es Salaam and Mombasa Port: 2009–2013 . . . . . . . . . .  128 TABLE 19: Dar es Salaam and Mombasa Cargo Destination 2011 . . . . . . . . . . . . . . . . .  128 TABLE 20: Indicative Costs for Importing 40-Foot Container into Kampala from Mombasa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  140 TABLE 21: Transport Prices Along the Central and Northern Corridors: 2011–2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  140 TABLE 22: Composition of Current Total Operating Costs per Kilometer in East Africa (Bank-Financed 8-Year-Old Truck) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  141 1 Chapter 1: Political Economy of Regional Integration in Sub-Saharan Africa: A Summary 1. Introduction than in other parts of the world. Economic integration is typically difficult, especially among less developed econ­ Regional integration in sub-Saharan Africa (SSA) is crucial omies. In addition, failed integration attempts and slow for its further economic development and, more impor­ implementation of integration policies is a global pattern, tantly, its structural transformation away from agriculture not only an African one. Furthermore, efforts at integra­ toward higher value-added activities, such as manufactur­ tion are more likely to succeed when they have strong ing and services. Yet there are many paths toward greater internal support among the governments and/or private inte­ gration, some of which are easier than others. In addi­ sectors of the member states as well as take a pragmatic tion, integration need not follow a linear path or occur and flexible path to integration rather than a rigid and all-­ mainly through formal inter-governmental economic coor­ encompassing one. There is no question that it is these dination. In order to gain insights into how regional inte­ factors that are behind recent progress in regional integra­ gration is occurring in SSA, determine impediments to it, tion in SSA. Similarly, economic integration is more likely and develop recommendations for how the World Bank to succeed when it occurs alongside regional attempts at and other devel­ opment agencies can help further facilitate improving political stability and/or developing joint infra­ it, the World Bank commissioned a set of political economy structure. We see evidence of this in the sub-Saharan Africa of regional integration studies covering sector analyses as well. For these reasons, arguably, regional integration in of agriculture,1 financial services,2 professional services,3 sub-Saharan Africa is perhaps somewhat more successful trade facilitation,4 and transport.5 These studies comprise than one would predict given the challenging environment the main chapters of this volume. This introductory chap­ in which it is occurring. The studies that follow highlight a ter summarizes the findings from the sector studies and number of these accomplishments and suggest guidance derives recommendations for the World Bank and other for efforts to contribute to these positive outcomes. development agencies in their effort to support deeper regional integration in Africa. In a comparative context, the findings of the studies 2. Paths to Integration suggest cautious optimism for regional integration efforts There are many ways that countries in SSA can integrate in sub-Saharan Africa. They also question perceptions that their economies and some of them are easier and more regional integration in SSA is doomed to be less successful sensible than others. The textbook economics method, progressing sequentially from free trade to deeper eco­ nomic integration, is one of many and perhaps not the most 1 Swinnen and Janssen 2015. sensible for SSA. Venables (2003), for example, argues that 2 Arriola and Osoro 2015. 3 Dihel and Jelenic 2015. free trade areas among countries with differing levels of 4 Kirk 2015. economic development can have polarizing effects: the rel­ 5 Hoffman and Kidenda 2015. atively less developed economies may suffer losses, while the more advanced regional economy secures most of the gains. The reason for this is because economic integration Paul Brenton, Lead Economist, Trade and Competitiveness can permit the more developed economy to dominate the Global Practice, World Bank and Barak D. Hoffman, Public higher value-added sectors due to its relative advanced Sector Specialist, Governance Global Practice position (Krapohl 2010; Venables 2003). 2 Political economy of regional integration in sub-saharan africa There is empirical support for this in SSA. For example, 2010; Kurlantzick 2012; Venables and Collier 2008). After one of the reasons the original East African Community many decades of non-interference, most governments in (EAC) collapsed in 1977 was because of Kenya’s domina­ the region realize these benefits and are actively pursu­ tion of it (Venables 2003). Moreover, the South African Cus­ ing them. This is most evident in the African Union’s (AU) toms Union (SACU) has deterred structural transformation peacekeeping efforts in the DRC, Somalia, and Sudan. of Botswana, Lesotho, Namibia, and Swaziland (Alden and These efforts are a radical departure from the Organiza­ Soko 2005). More broadly, this is evident in the financial, tion of African Unity’s policy on non-intervention. It is also telecommunications, and consumer retail sectors where apparent at the sub-regional level. The Economic Commu­ South African and, more recently, Kenyan and Nigerian nity of West African States’ (ECOWAS) joint effort to fight firms are developing a strong regional presence. terrorism is one such example. Some East African Com­ While market integration is essential for firms in the munity (EAC) member states also have taken an active role region to create scale economies and achieve productivity in attempting to stabilize Somalia and South Sudan. Taking gains through agglomeration, due to the real losses less this responsibility is commendable and sensible given that developed economies can suffer, other forms of integra­ the spillovers from instability are large as are the economic tion are equally as important and are occurring. In particu­ benefits from peace. It also sets a foundation for efforts lar, development of joint infrastructure, especially in the for future integration. By contrast, divisions within the transport and energy sectors, is an extremely beneficial Southern Economic Development Com­ munity (SADC) over form of regional integration in SSA. There are a number of Zimbabwe have hindered progress in regional integration reasons for this (Venables and Collier 2008; Draper 2010; in Southern Africa. Similarly, COMESA’s experience dem­ Hartzenberg 2011). First, as a result of the large number onstrates that political instability in some member states of countries in the region and their comparatively small (primarily Libya, South Sudan, and Sudan) creates large populations, building infrastruc­ ture at the national level is barriers to market integration because such efforts are not expensive due to its high fixed costs. Regional infrastruc­ a priority for these states. ture projects, by contrast, achieve economies of scale not A third path toward greater integration is through the possible at the national level. Second, while there are sig­ independent efforts of the private sector (Byiers et al. 2013; nificant positive externalities for coastal countries to link Cowles 1995; Mattli 1999). This is very evident in the finan­ to their landlocked neighbors, the former are unlikely to cial, telecommunications, and retail sectors. While firms take these into account and thus provide a lower level of are mainly undertaking these expansions to increase their national infrastructure than they would if the countries own profits, they nevertheless facilitate greater regional were a single entity. integration. The study on financial services discusses in Some governments in the region have recognized detail how this is occurring at the moment in East Africa. these benefits and are investing substantial effort in cor­ Another example is the effort supermarkets are undertak­ ridor development strategies. The most successful one to ing to develop backward linkages in the agricultural and date is the Maputo Development Corridor that links Johan­ food processing sectors. East African regional chains are nesburg and Maputo. Others include the Standard Railway very vocal about their efforts to source locally. While the linking Djibouti and Ethiopia, Eskom’s attempts at building sector is small, it nevertheless has the potential to improve a regional electricity network in Southern Africa, and the integration in the agricultural and transport sectors. The nascent Standard Gauge Railway in East Africa. The latter agriculture study, for example, shows that the sector is lag­ two face substantial implementation challenges due to ging in developing value chains in medium and low value their cost and complexity. In addition, many governments staple crops that are somewhat more difficult to process, in Africa have increasingly come to recognize the benefits such as maize and wheat. The consumer retail sector has of trade facilitation by coordinating operations of customs the potential to help address this issue through increasing and other agencies. The growing number of One Stop Bor­ the size of the local food processing sector. In addition, der Posts is a highly visible example of this. the transport sector study shows how the development of A second crucial type of regional integration is cooper­ regional supply chains has led to improvements in the effi­ ation to enhance regional political stability6 (Draper ciency of the transport network in the EAC. Due to these multiple and complementary paths to 6 This is not unique to Africa. For example, enhancing regional integration, one of the main findings of the studies is that stability was the original rationale for the creation of the Associa­ the amount of integration we currently see in SSA is sub­ tion of Southeast Asian Nations (ASEAN). stantially greater than an examination of formal efforts to Chapter 1: Political Economy of Regional Integration in Sub-Saharan Africa: A Summary 3 integration, such as implementing policies or transferring which operate regionally and/or those wishing to do so authority to supra-national organizations, would suggest. would greatly improve these prospects. In addition, they demonstrate that these efforts can facili­ Prior to discussing the results of our studies in this tate the more difficult adjustments that market integration area, it is useful to highlight the role of the private sec­ can necessitate. Finally, the studies help elucidate which tor in creating one of the most successful contemporary paths toward integration are easier than others and why. RECs, the EU. The view that integration in the EU offers Such insights are crucial for creating programs to support a textbook model of gradual efforts to deepen economic it. Below we discuss this in detail and situate it within the cooperation is not consistent with the way the process broader literature on the political economy of regional actually unfolded (Cowles 1995; Mattli 1999). Many stud­ integration. ies that wonder why economic integration in SSA is unfold­ ing so slowly and argue that regional institutions do not serve substantive purposes often compare these efforts 3. Political Economy of Regional unfavorably to the EU integration process. Looking back Integration at the way it actually occurred in the EU offers a useful corrective. The 1957 Treaty of Rome provided the founda­ The literature on the political economy of regional integra­ tions and outlined the process for regional integration in tion is not large, but its findings are relatively consistent. Europe. The EU did not come into existence for another Most studies agree that three main factors determine etary union for thirty-five years and it did not achieve a mon­ whether and how regional integration will occur. Integra­ close to five decades later. Moreover, efforts at European tion is more likely to occur when: integration stalled for decades following the signing of the ■■ Private sector support is strong treaty and pessimism about it was common. For example, a 1982 editorial in The Economist claimed, “A 25-year-old ■■ At least one government takes the lead on implementation in a coma is a pitiful sight. Next Thursday marks the 25th ■■ The number of actors is small anniversary of the signing of the Treaties of Rome, which created the European Economic Community. It will be cel­ ebrated with a sickly silence.” To ensure that no reader 3.1. Strong Private Sector Support would misinterpret the editorial, a tombstone reading “EEC Of the three factors, strong private sector support is by far Born March 25, 1957—Moribund March 25, 1982” sits at the most important for successful economic integration the top of the page. (Byiers et al. 2013; Cowles 1995; Mattli 1999).7 While this The impetus for the rapid progress toward further finding is unsurprising, it nevertheless is worth discussing integration that began in the 1980s came not only from in detail because formal regional integration efforts in SSA governmental efforts, but private sector pressure as well. often do not actively involve the private sector8 (Hartzen­ Starting in the mid-1980s, lobbying pressure for integra­ berg 2011). That economic integration can only succeed tion from leaders of some of Europe’s largest companies, through the activities of the private sector is nearly tau­ such as Philips, Shell, Siemens, Unilever, and Volvo became tological for market economies. Governments can provide increas­ ingly intense. Their chief complaint was (Cowles inducements for firms to invest and increase trade among 1995, 507): a regional eco­ nomic community (REC), yet it is up to firms to initiate these actions. In many cases, the regional inter­ In reality, despite ambitions to liberalize trade… ests of private firms also are quite distinct from those of Europe remains a group of separated national mar­ governments (Alden and Soko 2005). The most unam­ kets with separated national policies and sep­arated biguous policy recommendation from the studies is that industrial structures. This prevents many firms from if governments would like to make more rapid progress reaching the scale necessary to resist pressure in economic integration, soliciting greater input from firms from non-European competitors. Comparing the evolution of integration in sub-Saharan 7 Private sector support is less necessary when integration is Africa to that of the EU can help clarify views about the per­ part of a strategy to increase security and state stability. These studies are beyond the scope of this work. ceived slow pace of it in the former. Wondering why govern­ 8 As we discuss below, the private sector more commonly works ments agree to integration policies, but fail to imple­ ment to impede integration efforts in sub-Saharan Africa. them is not unique to Africa. Rather, implementation of 4 Political economy of regional integration in sub-saharan africa many of the parts of the Treaty of Rome followed decades the trucking sector regionally so any truck can pick up and of increasing private sector integration, it didn’t precede deliver cargo between any two points in the region are not it (Cowles 1995; Mattli 1999). In addition, while govern­ nearly as strong. ments and the private sector often support integration, Finally, the studies of the agricultural sector and on they do so for different reasons and, as a result, achieve it trade facilitation demonstrate clear and conflicting pri­ through different means. This is very evident in the studies vate sector and government interests in agricultural trade. of the agricultural, financial services, transport, and trade Over the past few decades, liberalization, democratization, facilitation. and, more recently, rising food prices have led to signifi­ The study on financial sector integration in the EAC cant increases in agricultural production. The extent of the makes the contrasting views between governments and increase is a function of two factors: value chain complexity the private sector clear. The key priority among the former and crop value. Growth has been weakest in medium and is a monetary union. As a result, governments and officials low value crops with complex value chains, while growth in the EAC devote an enormous amount of time focusing has been higher in crops with low value chain complexity on the conditions necessary to achieve it, such as the time­ and agricultural products with high prices. For the latter, line for introduction and macro-economic convergence high prices provide an incentive for producers to internal­ criteria. They have not allocated commensurate effort to ize the value chain. This situation exists because while gov­ regulatory harmonization in the financial sector nor does ernments have ended policies that deter production, they the EAC have an official role as a financial sector regulator. have not enacted ones to encourage it, especially among By contrast, banks in the region are chiefly interested in complex value chain products. Rather, market failures, increasing their profits. They are not motivated toward EAC such as poor contract enforcement and costly oversight, integration for political reasons, but economic ones. While deter investment in these sectors. they would welcome regulatory harmonization because it The result is that production methods for many staple would allow them to work more efficiently, they have found crops still rely on rather rudimentary procedures, leav­ ways to operate regionally despite poor government coor­ ing them heavily exposed to adverse shocks. When this dination by registering as domestic businesses in other occurs, many governments in the region scramble to countries. This is a sub-optimal outcome as it fragments secure sufficient food stocks, often through export bans. bank operations, impedes the development of regional While they have not delivered food security, such mea­ capital markets, and reduces competition. Nevertheless, it sures deter investment in growing staple crops for export. is a stable status quo because banks that have the capacity Along the same lines, fears among urban consumers that to expand have found a way to do so and adopting differ­ they may not have sufficient food often push govern­ ent standards of operations in various countries places the ments to take an anti-trade bias, at least publicly. Even bur­ den of adjustment on the banks, not the governments. though there is no question that regional food markets The latter therefore can avoid difficult coordination nego­ would do a better job of ensuring food security than uni­ tiations across borders. lateral measures, collective action problems, spe­ cifically The study of the transport sector in the EAC is also an that partner governments will close their borders if food excellent example of the private sector acting in a manner shortages appear imminent, have led to non-coop­ erative similar to that in Europe, albeit at a much smaller scale. equilibria. In addition, although governments have liberal­ Especially along the Northern Corridor of the EAC, trans­ ized the domestic agricultural sector, high transport costs port sector efficiency is improving at a fairly rapid pace. and non-tariff barriers, such as complex regulatory stan­ One of the main reasons is because various firms in the dards, further deter trade. private sector, especially transporters, logistics providers, By contrast, there is little doubt that farmers are eager and traders are placing pressure on governments in the to trade. The agricultural sector has responded positively region, especially the Government of Kenya, to increase to liberalization reforms and rising food prices. Overall, the efficiency of operations at Mombasa port, reduce the average annual output growth in the sector has been number of roadblocks and weighbridges along the roads, about 4.5% since 1990 and accelerated to 5.2% since 2007 and reduce time at borders. It is also clear that their motive when prices began to rise. In addition growth in low and is in pursuit of their own profits, not regulatory harmoni­ medium value crops with complex supply chains has been zation as an end to itself. For example, while many firms very high since 2007, suggesting that the private sector can in the region have strongly encouraged governments to respond effec­ tively to the aforementioned market failures enact the aforementioned changes, demands to liberalize as crop prices rise through, for example, engaging more Chapter 1: Political Economy of Regional Integration in Sub-Saharan Africa: A Summary 5 intensively with farmers to ensure they fulfill their commit­ problems (Mattli 1999). Implemen­ tation is more likely to ments to buyers. While official data show that about 25% of succeed if at least one government takes the lead in solv­ intra-African trade is in agriculture, this is a severe under­ ing these coordination problems. Two, regional integration statement because it neglects the very sizable amount of can cause permanent losses for some sectors of certain informal trade, which, in turn, reflects continued presence economies (Krapohl 2010; Venables 2003). It is under­ of policy and regulatory barriers to formal trade. standable that governments may be reluctant to impose Problems with regional integration in the agricultural them in the absence of pressure. sector are closely tied to difficulties with increasing produc­ The EU is a particularly salient example of the impor­ tion as well. This includes problems of land ownership, tance of one country taking the lead in implementing poor use of inputs and capital intensive production meth­ regional inte­gration agreements (Mattli 1999). Due to the ods, and threats of expropriation when negative shocks large number of countries in the organization and the occur. Developing value chains toward more enhanced numerous complex integration negotiations, it is unrea­ production is therefore central to any policies to support sonable to believe that countries would coordinate their greater trade in agriculture. Fortunately, we see some evi­ positions voluntarily. Rather, integration became far more dence of how this could occur through the expansion of likely to occur when Germany took a lead role in pressing regional super­ markets. While these efforts are small, they for it in areas such as setting the integration agenda and nevertheless hold the promise of creating spillover effects being the largest contributor to the EU. Because Germany and a larger constituency for agricultural trade. is the largest economy in the EU and large parts of its pri­ A key issue for deeper regional integration of agricul­ vate sector support integration, it is able to fill this lead role ture in Africa is that while tariffs on regional trade in out­ effectively. puts have declined, restrictive policies may have shifted to We see similar patterns across sub-Saharan Africa. dis­ torting regional trade in inputs. From a political economy While government support tends to be congruent with view, control over inputs can be important. Fertilizer and private sector interests this need not be the case. In par­ seed subsidies have been used in many SSA countries and ticular, the divergent interests toward regional integration have been targeted at specific groups of farmers. There is between Kenya and South Africa explain a large part of the increasing evidence that regulations and input distribution variation in the relatively impressive performance of the costs (including taxes) are hurting farmers. Cross-border EAC com­ pared to SADC. movement of seeds and fertilizer is hampered by Sanitary After South Africa’s democratic transition and global and Phytosanitary (SPS) requirements and other regula­ diplomatic normalization, the country’s private sector tions, differences in certification and standards between aggressively pursued economic opportunities throughout countries and the resulting issues of checking compliance the region (Alden and Soko 2005; Amos 2010; Hentz 2005; at the borders (World Bank 2012). Lack of agreement on Krapohl, Meissner, and Muntschick 2014). Today, South standards between countries as well as mistrust in other African firms trade and invest in a range of sectors across countries’ testing and certification capabilities often trans­ the region, including min­ ing, construction and manufac­ lates into duplicate procedures, associated with high costs. turing, agriculture and food processing, financial services, These duplicate procedures also raise revenue for certify­ consumer retailing, transport, tourism and hospitality, and ing bodies, which creates an additional obstacle for remov­ telecommunications. In addi­ tion, South Africa’s regional ing them (Keyser 2015). trade is heavily concentrated in SADC. For these reasons, the country is in a strong economic position to take a lead role in deepening SADC integration. However, this is not 3.2 Lead Government occurring for a number of reasons. The second finding common to many political economy First, while SADC is a large market for South African studies of regional integration, including our own, is that exports, the country views global integration as a more integration agreements are more likely to succeed if at promising development strategy than regional integration least one government takes the lead on implementing it (Alden and Soko 2005; Amos 2010; Hentz 2005; Krapohl, (Mattli 1999; Mansfield, Milner, and Pevehouse 2008). This Meissner, and Muntschick 2014). As a result, its export-ori­ is not a surprising finding and there are two main rea­ ented growth strategy focuses globally, especially toward sons for it. One, enacting regional integration agreements the EU where it has a free trade agreement (FTA). By con­ requires an extensive amount of inter-governmental coor­ trast, there is no EU-SADC FTA since the EU refused grant­ dination. As a result, it is subject to many collective action ing South Africa the same types of preferential access it 6 Political economy of regional integration in sub-saharan africa allows less developed countries in the region to its mar­ Conference (SADCC), whose main purpose was to reduce kets. By contrast, the EAC and the EU recently enacted an Southern Africa’s economic ties to South Africa.10 FTA that includes all members of the former. Third, domestic politics interferes with the ability of the The unilateral agreement between the EU and South government to take a lead role in regional integration (Alden Africa has caused numerous strains in SADC that has and Soko 2005). The country continues to struggle with contrib­uted to its current fragmentation and indefinite high rates of unemployment and the Congress of South suspension to working toward a customs union (Amos Africa Trade Unions (COSATU) is very vocal in challenging 2010; Hentz 2005; Krapohl 2010; Krapohl, Meissner, and policies that may negatively impact its members. Economic Muntschick 2014). First, because the agreement lowered ization already has adversely impacted South Africa’s liberal­ South Africa’s common external tariff, other members of labor intensive manufacturing sectors. Exposing the coun­ SACU had concerns that they would lose revenue from try to greater competition to that sector of the economy imports under the revenue sharing agreement. That is therefore a highly sensitive issue in South Africa. As a South Africa negotiated the agreement without involving result, the SADC FTA protects this sector in South Africa. the other four members of SACU subsequently became a This undermines the capacity of South Africa to serve as considerable source of tension between those countries catalyst for structural transformation in SADC. and South Africa. Second, the South Africa-EU FTA con­ However, there are two SADC regional integration tributed to the fragmentation of other SADC members efforts that are a priority for the government. The first ferent blocs to negotiate Economic Partner­ into three dif­ is the highly successful Maputo Development Corridor ship Agreements (EPA) with the EU. In particular, the latter (Alden and Soko 2005; Byiers, Vanheukelom, and de has not pushed to develop an EPA that covers all SADC Roquefeuil 2013). This project forms the core of a mas­ members except South Africa. Finally, because the various sive growth in bilateral trade and foreign direct invest­ment trade agreements among SADC member states with the from South Africa to Mozambique since the turn of the EU are different from each other, they substantially com­ millennium. The second, and somewhat less successful, plicate the development of a SADC customs union. This is effort has been to place Eskom at the center of Southern one reason efforts toward further integration have stalled Africa’s electricity generation and distribution network. and SADC is now engaged in developing the COMESA-­ While Eskom imports from Lesotho and Mozambique, and EAC-SADC Tripartite agreement, which is seen as a critical exports to Botswana, Lesotho, Namibia, and Swaziland, the stepping stone toward the grander plan for a continental Government of South Africa has much greater ambitions. free trade area by 2017. They have not yet come to fruition due, in part, to short­ Second, while South African firms have a strong pres­ ages within South Africa and challenges with the develop­ ence in the region, the Government does not always advo­ ment of the Inga Dam in the DRC. cate for the interests of its domestic private sector (Alden The Government of Kenya, by contrast, is eager to take and Soko 2005). South Africa not only has a large trade a lead role in EAC integration (Booth et al. 2014). The two surplus with the rest of the region, it also exports many fin­ most recent presidents of Kenya have been strong pro­ ished prod­ ucts to SADC member states, but mainly imports ponents of regional integration. Both presidents have primary ones. More broadly, its history of apartheid as well very close ties to the private sector, ran on pro-business as its economic domination of the region makes the gov­ platforms, and have largely been receptive to private sec­ ernment somewhat reluctant to exercise a leadership role tor interests. In addition, both presidents have supported in SADC out of concerns over a backlash due to perceived reforms to liber­ alize the economy and placed serious South African hegemony.9 In this context it is useful to effort in improving the country’s transport infrastructure. recall that SADC grew out of an older regional integration As a result, a wide range of Kenyan firms have developed effort, the Southern African Development Coordination 10 SADCC is a good example of a reasonably successful regional integration effort whose purpose was mainly political, not econom­ ic. The organization’s main purpose was to isolate South Africa regionally, push for the end of apartheid, and press for Namibia’s independence. It grew out of an earlier initiative of the 9 South Africa’s GDP accounts for about 60 percent of total Front Line States (Angola, Botswana, Mozambique, Tanzania, and SADC GDP and the majority of South Africa’s exports go to SADC Zambia) to secure these objectives as well as assist in Zimbabwe’s member states. efforts at independence. Chapter 1: Political Economy of Regional Integration in Sub-Saharan Africa: A Summary 7 and/or expanded their regional operations. Many of these mainly reacting to the concerns of its clearing and have become household names, such as Safaricom, Kenya forwarding agents that would have been adversely Commercial Bank, Equity Bank, Kenya Airlines, Nakumatt, harmed by it. Tusky’s, and Uchumi. For these reasons, the Government ■■ The chapter on trade facilitation also demonstrates of Kenya has become not only supportive of integration that many governments are reluctant to reduce the efforts, but also has taken a lead in implementing them. number of regulatory agencies involved in trade, Recent examples include expanding Mombasa Port, start­ despite the large inefficiencies and dubious value they ing construction on the Standard Gauge Railway, and create, because many of them self-fund through the implementing the Single Customs Territory. fees they generate through inspections. The chapter on the transport sector provides insights ■■ The chapter on agriculture shows that even though into the catalytic role that a lead state can play in imple­ export bans on staple crops in aggregate worsen menting regional integration agreements. Kenya’s central food security in sub-Saharan Africa, governments role in integrating the transport sector is clear. While the nevertheless often implement them due to domestic Governments of Rwanda and Uganda had been urging the fears that trade will exacerbate food shortages. Government of Kenya to improve its transport infrastruc­ ture for years, because Kenya is a far larger economy and ■■ The study of professional services reveals that govern­ controls access to the sea, there was little these govern­ ments in the EAC are reluctant to integrate some ments could do to impose a solution on Kenya. By con­ sectors of their economy, despite shortages of skilled trast, the recent increases in efficiency and reduction in experts in areas such as law and engineering, in order transport prices along the Northern Corridor reflect quite to limit the amount of competition. deliberate efforts by the Government of Kenya to address ■■ The study on the transport sector makes clear that problems in the port and along the roads. Likewise, there trucking firms are not supportive of efforts to liberalize is also no question that Kenya is taking the lead role in the sector within the EAC and governments are expanding the regional transport network through proj­ therefore not pressing the issue. ects such as the Standard Gauge Railway and expanding Mombasa Port. However, the modal finding from the studies is that 3.3 Number of Actors most states in the region are often unwilling to take a The final main finding in the literature on the political econ­ lead role in furthering integration. This is not surprising omy of regional integration is that negotiations become because many economic integration policies will impose more difficult as the number of actors rises (Byiers, Van­ losses on some sectors of some of their economies. Many heukelom, and de Roquefeuil 2013; Mansfield, Milner, and studies attribute reluctance to inflict these harms to lack of Pevehouse 2008; Matti 1999). This is not surprising and political will, a somewhat vague and unclear term. A more is consistent with the broader literature on bargaining elucidating explanation is that governments are unlikely to and collective action. The two main reasons are because cause some sectors of their economies to suffer, even if transac­tions costs and the probability of divergent prefer­ the aggregate gains outweigh the costs, absent stronger ences both increase as the number of actors rises. This countervailing pressure. The chapters in this volume pro­ finding relates very closely to the one on leadership. While vide numerous examples of this: negotiations can succeed among a small set of individu­ ■■ The chapter on trade facilitation demonstrates that als even in the absence of a clear leader, this becomes the Government of Zambia was a principal cause of more difficult as the number of parties grows. NAFTA and COMESA’s delay to implement a Regional Customs the failed Latin American Free Trade Association (LAFTA) Bonds Guaran­tee.11 The Government of Zambia was are clear examples of this. The United States and Can­ ada already had a free trade agreement when Mexico proposed NAFTA. In addition, Mexico is far more tightly 11 Many countries demand that transporters of transit cargo integrated and dependent on the US economy than the pur­chase a bond guarantee when entering a country as a deter­ Canadian one. As a result, the negotiations were largely rent to selling the goods in the domestic market. Border agencies return the money when they determine the truck remains sealed bilateral. LAFTA, by contrast, was a far more unwieldy REC at the border. The Regional Customs Bonds Guarantee would and its negotiations have been far more complex as a eliminate these national policies in favor of a single COMESA-wide bond. 8 Political economy of regional integration in sub-saharan africa result. LAFTA began in 1962 with seven members12 and the fees they collect and, as a result, have a strong incen­ expanded to 1113 in 1970. They were able to establish a tive to broaden their mandate. Efforts to end or reduce free trade zone. However, LAFTA’s internal divisions led to these activities are very difficult because in many cases it the emergence of blocs with divergent preferences among requires either eliminating many positions in these agen­ its more and less developed members over the unequal cies and/or having the government fill the funding gap that distribution of gains and losses within the REC. While bet­ would result from fewer inspections. The aforementioned ter leadership might have been able to resolve these dif­ progress on the border of Kenya and Uganda has solved ferences, lack of it exacerbated the differences between this problem not by getting rid of these tests, but by hav­ the two groups of states. The organization folded in 1980 ing organizations work more efficiently with each other. due, in part, to a stalemate on this issue (Mattli 1999). This is an acceptable solution to transporters and traders Following a similar logic, the larger the number of because they care more about lengthy border procedures actors and/or organizations within a country that have than the costs of the tests. influence over integration policies, the more difficult it becomes. The case studies of professional services, trade facilitation, and the transport sector clearly support these 4. A Comparative Analysis of findings. For example, the study of professional services Africa’s Regional Integration shows that reaching agree­ ment across a range of profes­ sions among all EAC member states required reaching Most studies of regional integration in sub-Saharan Africa consensus among a number of government ministries and offer fairly pessimistic prognoses. The most common professional organizations on many issues, such as educa­ themes are that RECs have failed to spur trade, there tional requirements, licensing procedures, and migration. exists weak commitment to regional integration, and coun­ Many of these groups had divergent preferences and/or tries join many RECs, but fail to enact policies necessary wanted to place coordination problems on counterparts in for integration to occur (Draper 2010; Hartzenberg 2011; other countries. Reducing the number of participating EAC Yang and Gupta 2007). These are all somewhat valid com­ members and sectors turned an impasse into an oppor­ plaints. Regional integration can be difficult and Africa is tunity because those with divergent preferences choose far from the only region that suffers from failed RECs. Nev­ to not participate. This suggests that a variable geom­ ertheless, as the preceding sections have made clear, in etry approach to integration where a subset of countries a comparative context, when viewing Africa’s level of inte­ and/or sectors that have an interest in greater integration gration through a broader lens than only formal economic move among themselves may be more effective than a integration arrangements, there are numerous reasons more rigid and comprehensive framework. Moreover, the for optimism that integration will strengthen in the future. study of the transport sector demonstrates that effective First, and most important, one crucial reason African coordination in that sector solved many impediments to regional trade is small is because few countries in SSA have integration. The chapter details how joint-border commit­ structurally transformed their economies (Venables 2003; tees, comprised of representatives from the public and Venables and Collier 2008; Yang and Gupta 2007). As a private sector, have made very impressive progress in result, a large portion of imports into Africa are of finished streamlining border crossing procedures between Kenya goods that few economies in the region produce on a large and Uganda. scale. Therefore we can’t separate low levels of trade in By contrast, the chapter on trade facilitation demon­ Africa from its lack of structural transformation. Because strates very clearly how the proliferation of regulatory the latter largely has not yet happened in the region, Afri­ agencies has, in effect, become a non-tariff barrier. A can economies remain heavily dependent on imports of number of governments in SSA have allowed these to con­ finished goods only produced in other regions of the world. tinue to grow using the argument that they perform a vital Second, when we broaden our lens beyond economic quality control function. However, in many countries this integration alone, it is clear that regional integration is has led to the creation of agencies that self-fund through occurring in many important areas and is providing large economic benefits. The clearest example is in security and stability. Conflict is economically disastrous, while peace 12 Argentina, Brazil, Chile, Mexico, Paraguay, Peru, and Uruguay. pays a large economic dividend. The region has come a 13 Bolivia, Colombia, Ecuador, and Venezuela. long way from the non-interference policy of the OAU, Chapter 1: Political Economy of Regional Integration in Sub-Saharan Africa: A Summary 9 and its tolerance for coups and regional wars. Today, the SADC is the most prominent case of the aforemen­ AU and sub-regional organizations are leading efforts tioned challenges to regional integration in SSA as we to provide peace and sta­ bility. In addition, countries are explained above. In addition, ASEAN and, to a lesser extent coming together to build regional infrastructure, such as the EU, began primarily as integration efforts to promote the Maputo Development Corridor, the Standard Gauge regional peace and stability, not economic integration. Railway in East Africa, and regional electricity networks in Rather, this cooperation later facilitated progress on eco­ Southern Africa. These efforts will take time to come to fru­ nomic integra­ tion. Furthermore, ASEAN’s biggest success ition, but will help solve two critical challenges to economic was negotiating FTAs with China, Japan, and Korea (Kur­ development in the region, costly and unreliable electricity lantzick 2012). This is the exact type of agreement the EU and high transport costs. was unwilling to nego­ tiate with SADC, but was with the Third, while many criticisms of RECs in SSA are valid, EAC. The latter greatly increases the prospects for suc­ they also lack historical and contemporary context. It is cessful regional integration in East Africa. Finally, Mercosur certainly true that many of them suffer from poor design was the outcome of close to thirty years of failed regional and weak commitment to implementation. Overlapping integration attempts of various kinds in Latin America. membership is also a challenge. However, Africa is hardly The pessimistic view that regional integration can only unique in this regard (Krapohl 2010; Mattli 2009). Europe play a limited role in Africa because of relatively small size suffered from lack of government interest in integration for and similarity of endowments between countries is still many decades prior to the rapid and unexpected progress common. Our studies challenge this conventional wisdom. it starting making in the 1980s. The European Free Trade It is becoming increasingly apparent that there is enor­ Area was also a poorly designed and unsuccessful attempt mous scope for increased cross-border trade and invest­ at European Integration. Latin America had its share of ment in Africa.14 Moreover, with rising incomes in Africa failed RECs, such as LAFTA and the Central American Com­ there are growing opportunities for cross-border trade in mon Market, as well. Finally, the Association for South East basic manufactures, such as metal and plastic products, Asian Nations (ASEAN) languished for many years, suffered and processed food that are costly to import from outside poor leadership and interest in integration, and traded the region. The potential for regional production chains little among member states before developing into a more has yet to be exploited and cross-border trade in services cohesive organization. This is not to excuse African coun­ offers similarly untapped opportunities. tries for failing to learn the lessons of other unsuccessful How then can this potential be achieved and regional RECs. Rather it simply points out that Africa’s experience is integration leveraged to drive trade and structural typical, not an anomaly. transfor­mation in Africa? Our studies provide numerous Fourth, comparing progress in implementing RECs in examples of how successful integration efforts are occur­ SSA to more successful ones, such as ASEAN, the EU, Mer­ ring in con­ temporary sub-Saharan Africa and document cosur, and NAFTA, is fundamentally misleading for a num­ impediments to it are being overcome. The key messages ber of reasons. For example, the economics of integration are the need to mobilize the private sector to drive and in Africa are far more challenging for African RECs than frame regional integration efforts, the importance of a these four. According to Krapohl (2010, 18): country or group of countries leading the integration process, and finally that progress is more likely between economic asymmetries in and between regions smaller groups of countries and actors. The latter sug­ have various consequences for regional integra­ gests that while large regional organizations such as SADC, tion in the South which leads to the fact that the COMESA, and ECOWAS may be able to play key roles in character of such integration projects differs fun­ areas such as security they will be less successful in driv­ damentally from regional integration in the North. ing economic integration across a large group of countries. The success and stability of regional integration in Hence, success is more likely to come from allowing a flex­ the South is much more dependent on the reac­ tion ible or variable geometry approach which allows for a sub- of extraregional actors, Rambo [going alone] situa­ group of members to pursue common interests in deeper tions occur more easily due to intraregional compe­ tition, implementation problems are conse­ quently more severe and regional institutions are less likely 14 See, for example, the various contributions in Brenton and Isik to solve these problems. (2012). 10 Political economy of regional integration in sub-saharan africa integration, and at different speeds, within the overall inte­ ■■ Focus on joint infrastructure. Africa’s infrastructure gration process of the regional bloc. This is the typical pat­ deficit is large and the costs of developing it are tern of regional integration. The split in the EU between daunting. In many instances, it is sensible to consider countries which use the Euro and those that do not is infrastructure development from a regional point one prominent example. The evolution of NAFTA from an of view rather than a national one. Not only can FTA between Canada and the United States is another. In this help leverage economies of scale in financing the final section below, we provide concrete suggestions infrastructure development, it can also help create the for Bank staff working to accelerate regional integration foundations for greater integration efforts by reducing in SSA. costs of trade. The returns to these investments are enhanced when they are accompanied by policy reforms that remove barriers to the movement of 5. Recommendations goods, investment, services, and people. For example, investments in connective transport infrastructure The studies suggest the Bank could engage in useful need to be accompanied by measures that lead to efforts to facilitate greater integration efforts. Below we faster border procedures, the removal of roadblocks, offer a few recommendations. fewer weighbridges, and greater competition among ■■ Prioritize flexibility over rigidity. It is tempting to transport providers. want to work through existing regional economic organizations, such as COMESA, ECA, and SADC, to pursue integration efforts. However, most of Africa’s References RECs have states with highly divergent integration Alden, Chris and Mills Soko. 2005. “South Africa’s Economic priorities. Working through formal RECs therefore can Relations with Africa.” Journal of Modern African Studies. often be more of an imped­ iment to integration than a 43(3): 367–392. benefit. Instead, in many instances, it makes sense to Amos, Saurombe. 2010. “The Role of South Africa in SADC allow a subset of countries to move forward in one area Regional Integration.” Journal of Commercial Law and Tech- and use these gains to work on a broader set of issues nology. 5(3): 124–131. and/or countries. Arriola, Leonardo and Jared Osoro. 2015. “Political Economy of ■■ Encourage simplicity over complexity. Many Financial Sector Integration in the East Africa Community.” integration efforts stall because they pursue complex Chapter 3 in The Political Economy of Regional Integration in sub-Saharan Africa. Washington, DC: The World Bank. negotiations across a range of government agencies. Booth, David, Brian Cooksey, Frederick Golooba-Mutebi and This approach gives groups opposed to integration Karuti Kanyinga. 2014. East African Prospects: An Update leverage to block progress toward it. In addition, it on the Political Economy of Kenya, Rwanda, Tanzania and also strains the capacity of many governments. One Uganda. London: Overseass Development Institute. way to minimize these impediments to integration Brenton, Paul and Gozde Isik. 2012. De-Fragmenting Africa: in some areas is to encourage mutual recognition of Deepening Regional Trade Integration in Goods and Services, standards rather than policy harmonization. Within a World Bank, Washington DC. REC, for example, countries could choose to recognize Byiers, Bruce, Jan Vanheukelom, and Quentin de Roquefeuil. the standards of the most stringent member state in 2013. Arguing a Political Economy Approach to Regional Inte- the particular sector. gration. Manuscript. Cowles, Maria Green. 1995. “Setting the Agenda for a New ■■ Reach out to the private sector. Governments are Europe.” Journal of Common Market Studies. 33(4): 501–526. unlikely to impose losses on certain groups absent Dihel, Nora and Micheal Jelenic. 2015. “Political Economy of pres­sure to do so from another set of domestic actors. Trade in Services in the East African Community.” Chap­ In addition, Bank projects often focus most of their ter 4 in The Political Economy of Regional Integration in sub- attention on working with governments. Reaching Saharan Africa. Washington, DC: The World Bank. out to private sector actors that have an interest in Draper, Peter. 2010. Rethinking the (European) Foundations of integration can help shift momentum toward this sub-Saharan African Regional Economic Integration. OECD outcome. In addition, firms already operating regionally Development Center Working Paper. may have innovative insights that might prove useful Hartzenberg, Trudi. 2011. Regional Integration in Africa. WTO for Bank staff working on integration projects. Staff Working Paper. Chapter 1: Political Economy of Regional Integration in Sub-Saharan Africa: A Summary 11 Hentz, James. 2005. “South Africa and the Political Economy of Mansfield, Edward, Helen Milner, and Jon Pevehouse. 2008. Regional Integration in Southern Africa.” Journal of Modern “Democracy, Veto Players, and the Depth of Regional Inte­ African Studies. 43(1): 21–51. gration.” World Economy. 31(1): 67–96. Hoffman, Barak and George Kidenda. 2015. “Political Economy Mattli, Walter. 1999. The Logic of Regional Integration. New York: of Transport Sector Integration in the East African Com­ Cambridge University Press. munity.” Chapter 6 in The Political Economy of Regional Inte- Swinnen, Jo and Emma Janssen. 2015. “Political Economy of gration in sub-Saharan Africa. Washington, DC: The World Agricultural and (Regional) Trade Policies and Value Chain Bank. Performances in sub-Saharan Africa.” Chapter 3 in The Keyser, J. C. 2015. ‘Regional Trade of Food Staples and Crop Political Economy of Regional Integration in sub-Saharan Inputs in Africa’ Chapter 7 in Trade Policy and Food Security: Africa. Washington, DC: The World Bank. Improving Access to Food in Developing Countries in the Wake Venables, Anthony. 2003. “Winners and Losers from Regional of High World Prices. Washington, DC: World Bank. Integration Agreements.” Economic Journal. 113(49): Kirk, Robert. 2015. “The Political Economy of Trade Facilitation 747–761. in Eastern and Southern Africa.” Chapter 5 in The Politi- Venables, Tony and Paul Collier. 2008. Trade and Economic Per- cal Economy of Regional Integration in sub-Saharan Africa. formance. Paper delivered at Annual Bank Conference on Washington, DC: The World Bank. Development Economics. Krapohl, Sebastian. 2010. Asymmetries and Regional Integra- World Bank. 2012. Africa Can Help Feed Africa, Removing barriers tion. University of Bamberg Working Paper. to regional trade in food staples, World Bank. Krapohl, Sebastian, Katharina Meissner, and Johannes Yang, Yongzheng and Sanjeev Gupta. 2007. “Regional Trade Muntsch­ ick. 2014. “Regional Powers and Leaders or Ram­ Agreements in Africa.” African Development Review. 19(3): bos?” Journal of Common Market Studies. 52(4): 879–895. 399–431. Kurlantzick, Joshua. 2012. ASEAN’s Future and Asian Integration. Council of Foreign Relations Working Paper. 12 Political economy of regional integration in sub-saharan africa 13 Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 1. Introduction ignoring how it fits in a longer policy development and how it compares to other regions of the world. The latter Recent events in agricultural and food markets have led is important to identify what is specific to the country or to what some have referred to as “a cacophony of policy region or the time period, and what is not. For example, responses” (Bryan 2013). In many cases governments earlier studies, focusing primarily on the period before interrupted trade flows, effectively banning food exports, the food price spikes in the mid 2000s (as illustrated by which in turn caused even larger shortages in importing Figure 1), identify major changes in Africa’s agricultural countries and enhanced price spikes (Anderson, et al. trade regimes and policies, with important implications for 2013). Also in Africa, government responses were some­ today’s farmers. times quick with sudden reversals and in conflict with their In this way the focus of the literature on policy reac­ formal commitments to open up regional trade in food. tions and political economy mimics the switch in focus of It is also argued that the actual impacts of regional the literature on the impact of food prices on malnutri­ trade commitments in sub-Saharan Africa, due to weak tion and poverty, where in the past much of this literature implemen­ tation in practice, on farmers and traders are emphasized the impacts of detrimental trade practices of limited at best; that tariffs and non-tariff barriers (NTBs) developed countries on rural poverty in Africa through its remain significant impediments to regional trade in food negative impact on global prices, while recent literature and in crop inputs; and that productivity of staple crops, has emphasized and focused on the negative impacts of grown mostly by small-scale farmers which constitute high food prices on poverty and food security through a plurality of the labor force in most countries in sub-­ its impact on consumption (Swinnen 2011; Swinnen and Saharan Africa, continues to stagnate. Squicciarini 2012). However, recent evidence suggests that In this chapter we review the evidence for these claims the earlier paradigm remains very useful to understand and analyze the political economy of decisions regarding the impacts of agricultural trade policies and food prices removing barriers to (regional) food trade in Africa and on rural poverty in Africa and elsewhere (e.g., Headey how political economy factors influence the implementa­ 2013, 2014; Verpoorten et al. 2013). It is therefore crucial tion of regional trade commitments. We also present a to use an integrated lon­ ger-run and global framework to value chain perspective to interpret the performance of understand the current developments and their effects commodities and sectors following agricultural and trade (Naylor 2014). policy changes. The chapter starts with documenting the RTAs in SSA A key observation regarding the literature is that much and then provides a brief summary of the literature with a of the recent studies on policy interventions—and also review of key arguments and shortcomings. In particular, on the political economy influences—seem to consider we will emphasize that to correctly assess the RTA impact the current situation as a “new paradigm” focusing very and political economy it is important to distinguish the strongly on local and temporary factors, thereby largely recent policy reactions to the global food price spikes from earlier government interventions, and to put these policy reactions by African governments in a global perspective. One should recognize that there has been significant Johan Swinnen and Emma Janssen, LICOS Centre for reform and an overall reduction of government trade inter­ Institutions and Economic Performance, KU Leuven ventions in agricultural markets over the past twenty-five 14 Political economy of regional integration in sub-saharan africa FIGURE 1: Global Food Price Index 300 250 Index (2002-2004=100) 200 150 Food Price Index Dairy Price Index 100 Cereals Price Index 50 0 2010 2011 2012 2013 1995 2014 1996 1997 1998 1999 2007 2008 2009 2000 2001 2002 2003 2004 2005 2006 Source: FAO years, with major heterogeneity in this, across commodi­ 2. Regional Trade Agreements ties (staple foods versus other commodities, and even within staple foods), across countries, and over time. in Sub-Saharan Africa: In addition, several of the observed policy develop­ The Literature ments are not specific to SSA, but appear to be very similar Regional integration in Africa has a long history and can be to policy changes in other parts of the world. Two exam­ traced back to the establishment of the South African Cus­ ples of these are the recent increase in NTBs and the ad toms Union (SACU) in 1910 (Geda and Kebret 2008). Since hoc responses to the food price spikes in recent years (see then, regional integration has come a long way.1 e.g., Wodon and Zaman 2008). This suggests that there Today, Africa is home to about fourteen regional trade may be broader forces at work than country-specific or or cooperation agreements (Meyer et al. 2010).2 The most region-specific explanations. important trade agreements include the Economic Com­ In drawing conclusions for the future, we point out that munity of West African States (ECOWAS), the Economic Africa has, on average, experienced (a) strong growth over the past decade; (b) a series of structural transformations (e.g., in access to information and in the development of— global and local—value chains), factors which distinguish it from the African economic and institutional develop­ 1 This is not just an African phenomenon, but a global, fairly ments of the previous decades; and (c) wide differences in recent, evolution. Some 489 regional trade agreements (RTAs) have been notified to the World Trade Organization (WTO) or its commodity performance, both before and after the price predecessor, the GATT, and 297 of those agreements are in force. spikes, which can be attributed to differences in the institu­ The proliferation of RTAs has been a relatively recent phenom­ tional organiza­ tion of commodity value chains. In fact, the enon: in 1991 there were only 50 RTAs in existence, and this num­ structural shift to higher food prices has caused significant ber has since been steadily increasing. In 2005, 180 RTAs were in increases in growth in output and productivity of the lag­ force, demonstrating the accelerated spread of agreements in the last few years. ging agricultural sectors in SSA, in particular cereal produc­ 2 According to UNECA and AU (2013), only eight RECs are recog­ tion. All this has potentially important implications for the nized by the African Union. Note however that there seems to be political economy of agricultural and trade policies. In this no consensus within the literature about how many RECs there chapter we will try to integrate these factors, and explicitly actually exist within Africa. This is probably due to different or account for them, in our analysis. inconsistent use of the definition of a REC. Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 15 Community of Central African States (ECCAS), the South- In 2008, COMESA, SADC, and EAC moved toward a ern Africa Development Corporation (SADC), Community tripartite free trade area, bringing together all twenty-six of East African States (COMESA), and the East African member countries (Engel et al. 2013). Community (EAC). Most countries are members of mul- APEI, the Accelerated Programme for Economic Inte­ tiple RTAs or Regional Economic Communities (RECs). Only gration (the most recent RTA), was launched in Septem- twelve countries belong to a single organization and one ber 2012. As the name suggest, APEI aims at speeding up African country belongs to four different RECs (Engel et al. eco­ nomic integration between the member states. APEI 2013). includes Malawi, Mozambique, Zambia, Mauritius, and ECOWAS was founded in 1975. In 1993, the treaty was Seychelles. revised to accelerate the process of integration. In 2006 In the remainder of this chapter we will compare its member states agreed on joining the existing UEMOA our SSA averages with indicators for four regional areas: Common External Tariff (CET) (Engel et al. 2013). ECOWAS ECOWAS, EAC, SADC, and APEI. plans to launch a custom union in 2015 (UNECA and Several studies have been conducted on Regional AU 2013). Today ECOWAS includes Benin, Burkina Faso, Trade Agreements (RTAs) in sub-Sahara Africa. Some Cape Verde, Gambia, Ghana, Guinea, Guinea-Bissau, Ivory papers looked at specific RTAs and regions, such as Geda Coast, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, and Kebret (2008) and Mima and Mainville (2013) on and Togo. ECOWAS, Afesorgbor and van Bergeijk (2011) on ECOWAS ECCAS was founded in October 1983. Due to financial and SADC, AECOM (2011) on SADC, Soko (2007) on SADC complications, it had to halt its activities for several years. and SACU, Khandelwal (2005) on COMESA and SADC, Har- It launched its Free Trade Agreement in 2004 but is fac- ris, Chambers, and Foresti (2012) on West Africa, World ing important practical challenges (UNECA and AU 2013). Bank (2009) on Eastern Africa, Mbekeani (2013) on South- Today ECCAS includes Angola, Burundi, Cameroon, Central ern Africa, Karugia et al. (2011) on EAC, and UNECA (2011) African Republic, Chad, Republic of the Congo, DR Congo, on the tripartite free trade agreement. Other studies cov- Equatorial Guinea, Gabon and São Tomé and Príncipe. ered RTAs across the continent. These include Hartzen- SADC was founded in April 1980 and was originally berg (2011), Keyser (2015), Khadiagala (2011), Meyer et al. named Southern African Development Co-ordination Con- (2010), UNECA and AU (2013), and Yang and Gupta (2005). ference (SADCC). In August 1992, SADCC was transformed Some of the key findings of these studies are the fol­ to SADC. From 2000 onward, the organization has gradu- lowing (see also Engel and Jouanjean (2013) and Engel et al. ally worked on cutting tariff and non-tariff barriers between (2013) for reviews). member states. Since 2008, SADC countries form a free- trade area with 85 percent of its trade duty-free. SADC ■■ Over the past decades, there has been a move plans to become a customs union in the nearby future toward greater regional integration within Africa, at (Engel et al. 2013). Today SADC includes Angola, Botswana, least formally (Afesorgbor and van Bergeijk 2011; Democratic Repub­ lic of the Congo, Lesotho, Madagas- UNECA 2011). Existing trade agreements have been car, Malawi, Mauritius, Mozambique, Namibia, Seychelles, deepened and new arrangements were signed (Geda South Africa, Swaziland, Tanzania, Zambia, and Zimbabwe. and Kebret 2008; Yang and Gupta 2005; UNECA 2011). COMESA: the idea originated in the mid-1960s but the The latter can be illustrated by the recent launch of COMESA treaty itself was signed on November 5, 1993. It the Accelerated Programme for Economic Integration established a FTA on 31st October 2000. COMESA launched (APEI). APEI aims at speeding up economic integration its custom union in 2009. Today, COMESA includes and to go beyond the provisions of the existing RTAs. Burundi, Comoros, Democratic Republic of Congo, Djibouti ■■ Although intra-regional tariffs have come down sub­ Egypt Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, stantially, barriers to trade seem to persist (Engel et al. Mauri­ tius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, 2013; Mima and Mainville 2013; Karugia et al. 2011). Zambia, and Zimbabwe. Reasons include issues related to infrastructure and EAC was signed on 30 November 1999 and entered trade related services (Bouët, Mishra, and Roy 2008; into force on 7 July 2000. With the launch of its common Pannhausen and Untied 2010), the presence of strong market in 2010, the EAC can be seen as the most advanced anti-reform lobbies (Hell­ man 1998), the fact that many community in SSA (Engel et al. 2013; UNECA and AU 2013). countries have had mixed experiences with past Today, the EAC includes Burundi, Rwanda, Kenya, Tanza- reforms (McCorriston, et al. 2013) and the role bribery nia, and Uganda. plays in total transport costs. 16 Political economy of regional integration in sub-saharan africa BOX 1: Country Coverage of RRA/NRA by Regional Trade Agreement 1. EAC South Africa, Swaziland, Tanzania, Zambia, and – Includes Burundi, Rwanda, Kenya, Tanzania, and Zimbabwe Uganda – RRA/NRA coverage: Madagascar, Mozambique, – RRA/NRA coverage: Kenya, Tanzania, and Uganda Tanzania, Zambia, and Zimbabwe 2. APEI 5. SSA – Includes Seychelles, Mauritius Malawi, Mozam­ – Includes Angola, Benin, Botswana, Burkina Faso, bique, and Zambia Burundi, Cameroon, Cape Verde, Central African – RRA/NRA coverage: Mozambique and Zambia Republic, Chad, Comoros, Congo (Brazzaville), Democratic Republic of the Congo, Côte d’Ivo­ 3. ECOWAS ire, Djibouti, Equatorial Guinea, Eritrea, Ethiopia, – Includes Benin, Burkina Faso, Cape Verde, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, ­Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Kenya, Lesotho, Liberia Madagascar, Malawi, Mali, Coast, Liberia, Mali, Niger, Nigeria, Senegal, Mauritania, Mauritius, Mozambique, Namibia, Sierra Leone, Togo Niger, Nigeria, Réunion, Rwanda, Sao Tome and – RRA coverage: Ghana, Ivory coast, Nigeria, and Principe, Senegal Senegal – NRA coverage: Benin, Burkina Faso, Cameroon, – NRA coverage: Benin, Burkina Faso, Ghana, Ivory Chad, Ghana, Kenya, Madagascar, Sudan, Senegal, coast, Mali, Nigeria, Senegal, and Togo Togo, Nigeria, Mozambique, Mali, Ethiopia, Ivory coast, Tanzania, Uganda, Zambia, and Zimbabwe 4. SADC – RRA coverage: Cameroon, Ghana, Kenya, Mad­ – Includes Angola, Botswana, Democratic Repub­ agascar, Sudan, Senegal, Nigeria, Mozambique, lic of the Congo, Lesotho, Madagascar, Malawi, Ethiopia, Ivory coast, Tanzania, Uganda, Zambia, Mauritius, Mozambique, Namibia, Seychelles, and Zimbabwe ■■ Related to this, many studies state that there has been p ­ olicy-making, especially in times of crisis. Another a significant increase in non-tariff barriers to trade relates to the design and implementation of African (NTBs) (Kalaba 2012; Hoekman and Nicita 2011; Keane, RTAs which diverges from traditional RTAs in that Cali, and Kennan 2010). they are often considered in their member countries ■■ Most studies agree that overall, RTAs in Africa have as establishing flexible regimes of cooperation as been poorly implemented. One reason often cited opposed to contain­ ing rules requiring scrupulous and is the fact that many countries are members of rigorous adherence (Gathii 2009). multiple RTAs (Khadiagala 2011). This could lead to ■■ There was widespread introduction of agricultural conflicting regulatory requirements and unnecessary tions, including significant trade barriers, in regula­ increased human and financial costs associated with recent years in staple food markets. Many studies membership. However, not everybody agrees with have pointed at the ad hoc interventions in staple food these latter conclusions. For example, Afesorgbor markets, marked by discretionary use of policies, such and van Bergeijk (2011) argue that there is a positive as export restrictions (bans and quotas), which may impact of multiple-membership if the additional have enhanced price volatility rather than reduced it. membership complements the integration process of the original RTA. While all these studies provide useful insights, there ■■ Studies point out problems of legitimacy and design are several caveats to take into account. of the RTAs. One issue is that most African countries ■■ It is not always clear what is meant by “staple foods,” and are reluctant to give up their autonomy over economic to what extent “staple foods” is a group of commodities Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 17 with common characteristics, and regulated by similar con­ straints. In this chapter we will try to address some of policies. these factors in our analysis. We also identify several areas ■■ It is important to put the RTA analysis in a global and where further research and data collection would be use­ in a longer term perspective. Several of the observed ful for a better understanding. policy developments are not specific to SSA, but appear to be very similar to policy changes in other parts of the world. Two examples of these are the recent increase 3. Observations and Stylized in NTBs and the chaotic responses to the food price Facts on Agricultural and Trade spikes in recent years. This suggests that there may be Policies in SSA and RTAs broader forces at work than country-specific or region- specific explanations. We now review how agricultural trade policies in SSA have evolved over the past decades and how this relates ■■ One cannot interpret the recent changes without to regional trade agreements. As we will document there taking a broader perspective on policy changes over have been major changes in agricultural and trade policies the past twenty-five years. in SSA and in the various RTAs. These observations and ■■ Similarly, one cannot evaluate the failure of RTAs to stylized facts will serve as inputs into the political economy pre­vent major policy interventions in the past years analysis. without considering a broader perspective. The To document the (changes in) agricultural and trade political incentives to intervene, and in quite dramatic policies, and to provide us with stylized facts, we use the fashion, during the 2007–2012 period has been global best indicator available, which are the Real Rates of Assis­ and one should be careful in concluding that it is due to tance (RRAs) and Nominal Rates of Assistance (NRAs) from failures of African RTAs. The failure of RTAs to prevent the World Bank’s Agricultural Distortions Project, led by the sudden growth in export bans, etc., should take Kym Anderson (Anderson 2009; Anderson and Masters into consideration the global phenomenon that (a) 2009).3 For SSA the dataset includes data from nineteen export policy constraints are often not (or very weakly) countries (Box 1 lists the countries and their grouping regulated in international trade agreements, and (b) by RTAs that we will use). We will present both the actual that the interest in doing so has just emerged after the numbers and “smoothed” graphs, which are used to better food price spike-induced policy interventions. illustrate historical trends. ■■ Again, looking at the medium- to long-term perspective, Figure 2 shows the evolution of RRAs for SSA as a whole which should be the target for RTA planning, structural since 1980. The figure clearly demonstrates the very sub­ developments such as sustained economic growth stantial reduction in taxation of agriculture in SSA over the in Africa, increases in foreign direct investment (FDI), past thirty-five years. The average level of taxation reduced and the associated growth of value chains, significant from more than 40% in the early 1980s to around 15% in investments in food processing, and the spread the early 2000s. In fact, the average RRA in 2005 was close of ICT and commercial mass media are all likely to to 0. However, the figures also clearly show the impact of fundamentally transform the political economy of the food price spikes after 2007 and how it caused a rever­ agricultural trade policies. sal, at the aggregate level, of policies. In recent years the ■■ The reports pay little attention to the role of value average RRA fell again to around 15%. chains and how they may affect the impact of trade These RRA evolutions are consistent with various case liberalization on sector performance. This may need studies documenting the reduction in agricultural taxation a more complex framework of analysis (i.e., one that over the 1985–2005 period, and the introduction of vari­ integrates the insti­ tutional organization of the value ous measures to limit the increase in food and agricultural chains). prices since 2007. These are the aggregate indicators. Not surprisingly, these average trends hide much heterogene­ ■■ There is little discussion about the issue that RTAs also ity across countries and commodities. have potentially detrimental effects by causing trade diversion. We believe that these elements are crucial to get an 3 See Anderson (2009) for definitions and an elaborate discus­ appropriate perspective on the role of RTAs and their sion of RRAs and NRAs. 18 Political economy of regional integration in sub-saharan africa FIGURE 2: Real Rate of Assistance to Agriculture (RRA) in SSA (Actual Numbers and Smoothed) 0 –0.1 Real rate of assistance (%) –0.2 –0.3 –0.4 –0.5 –0.6 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 0 –0.05 –0.1 Real rate of assistance (%) –0.15 –0.2 –0.25 –0.3 –0.35 –0.4 –0.45 –0.5 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: World Bank Data Estimates of Distortions to Agricultural Incentives 3.1 Variations among RTAs 3.2 Import—Competing versus Exportable Commodities Figure 3 shows that the level of taxation varied significantly between RTAs in the 1980s: from 10–20% in ECOWAS to As Anderson and Masters (2009) already indicated, there 60–70% in SADC and APEI. Yet across the entire continent is important heterogeneity in the RRAs and NRAs in sub- there was a significant reduction in taxation and the RRAs Sa­haran Africa not just between countries (and RTAs) but in all RTAs converged to around 15% in 2005. Since then also among different commodities. One of the key dis­ there has been a divergence again with average taxation tinctions they make is between “import-competing” and increasing again (RRAs becoming more negative) in East “exportables.” They conclude Africa (EAC) while falling further (RRAs increasing) in the ■■ that there exists an overall anti-trade bias with imports other RTAs. facing import tariffs and exports facing export taxes; and Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 19 FIGURE 3: Real Rate of Assistance to Agriculture (RRA) by Regional Trade Agreement (RTA) (Actual Numbers and Smoothed) 0.2 0 –0.2 –0.4 –0.6 –0.8 –1 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 SSA EAC APEI ECOWAS SADC 0 –0.1 –0.2 –0.3 –0.4 –0.5 –0.6 –0.7 –0.8 2006 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2008 2010 SSA EAC APEI ECOWAS SADC Source: World Bank Data Estimates of Distortions to Agricultural Incentives ■■ that there was a significant RRA gap between exporta­ ward (2006) and Swinnen, Vandeplas, and Maertens Dor­ bles, which were heavily taxed, and import-competing (2010), we disaggregate into several subgroups: products, which received some government protection, ■■ industrial crops (IC, including coffee, cocoa, tea, rubber, albeit relatively minor on average. oil crops, cotton, and tobacco), ■■ fruits and vegetables (F & V), 3.3 Staple Foods versus Other Agricultural ■■ roots, tubers, and pulses (RTP), Commodities ■■ cereals. To further understand the variations among specific crops and sub-sectors, we focus on staple crops versus Notice that “staple food crops” thus include two of our other types of commodities. Following Poulton, Kydd, and groups: “roots, tubers, and pulses” and “cereals.” 20 Political economy of regional integration in sub-saharan africa While these groups still include a mix of products, the Indications, applied weighted tariffs for primary products commodities in these groups share important common have fallen in SSA over the 1995–2011 period: from an characteristics (which we will discuss below in more detail), average of around 14% (which includes many agricultural and which will influence the impact of trade and market products, including staple foods) to around 6% in 2004. liberalization on the commodity performance. These are low numbers and average tariffs have If we look at the taxation/protection rates by commod­ remained low over the past decade. The food price spikes ity groups, again we see major differences. For SSA as a in the late 2000s did not change this. If anything they whole, staple crops were much less taxed than industrial reinforced the trend toward lower tariffs as governments crops and F&V. In fact, the NRAs of both staple crop groups reduced tariffs on food imports. Figure 7a and b illustrate have been close to zero for the entire period. Roots, tubers, that there are significant differences in average tariffs and pulses have been close to zero and there were few, if between the RTAs, but that the pattern of significant tariff any, domestic regulations of their markets. reductions to low average tariffs in recent years is common While cereals have been exported and imported, on for all RTAs. average, government policies, as captured by the NRAs, were neutral and, if anything, they were positive. For example in the 3.5 Increased Export Constraints since 2007 years 1987, 1991, 2005–6, and 2009, years of falling global cereal prices, there were brief periods of NRAs of 10–20%, The food price increases after 2007 did induce other gov­ probably reflecting domestic stabilization measures. ernment regulations to limit the price increases. In par­ Figure 4 clearly illustrates how the taxation of indus­ ticular governments tried to limit the outflow of food by trial crops and F&V was the main reason for the low aver­ imposing export constraints (mostly export bans) on food age NRAs in the decades before 2000. NRAs were –30% to exports. Various studies document the introduction of –50% in the 1980s and have gradually increased to taxa­ such export bans, in particular on cereals (e.g., Dorosh, tion rates of 5–10% (NRA = –5 to –10%). These commodi­ Dradri, and Haggblade 2009; Bryan 2013). ties were the main export commodities and governments However, these policy changes were not limited to taxed them heavily. This tax was gradually removed over SSA. In fact in many developing and emerging countries the past twenty-five years with liberalization processes, the same policy changes have been observed, including in often as part of broader structural adjustment programs. countries like China, India, Russia, Ukraine, Kazakstan (Bar­ Figures 5 and 6 illustrate commodity specific NRAs by rett 2014; Ganguly and Gulati 2013; Sedik 2011). In a com­ RTA. These figures show that for three of the four commod­ parative analysis Wodon and Zaman (2008) find that 22% of ity groups the patterns which we just identified for SSA as a African countries introduced export restrictions compared whole hold for each of the four RTAs: NRAs around zero for to 33% in non-African countries they studied (see Figure 8). roots, tubers, and pulses; increasing from heavy taxation to much less taxation for industrial crops and F&V. 3.6 Input Subsidies Only for cereals do we observe significant differences among regions. Cereal producers received significant sup­ Many African countries have implemented input subsidy port in EAC from 1990–2005, and in ECOWAS for the entire programs in the past decade. For example, Jayne and 1980–2005 period, but in both regions this support has Rashid (2013) document extensive government expen­ disappeared with increasing cereal market prices in recent ditures on fertilizer subsidies in the SSA countries since years. 2008. Several of these programs started earlier. How­ In contrast, cereal production was significantly taxed in ever, these input market programs are not captured by APEI and SADC in the 1980s but this taxation was removed the NRAs and RRAs since the input values for the indica­ and NRAs were close to zero for the 1993–2005 period in both tors are mostly zero. One reason may be that there are regions. (There are no NRAs for SADC after 2005 and APEI.) no official data on these subsidies—for most countries (Jayne and Rashid 2013, have computed their estimates from “secondary data”). In any case, the RRAs and NRAs are 3.4 Declining Import Tariffs probably overestimating taxation (underestimating subsi­ While the NRAs document a reduction of taxation of farm­ dization) because of this. However, as we explain later in ers in SSA, data on import tariffs suggest that other impor­ the document, regulations of input markets may also hurt tant policies have also been liberalized over the past twenty producers, which would have the opposite effect on RRAs years. As Figure 7 shows, based on World Development and NRAs. Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 21 FIGURE 4: Nominal Rate of Assistance to Agriculture (NRA) by Commodity Groups COMMODITY NRAS IN SSA 0.3 0.2 0.1 0 –0.1 –0.2 –0.3 –0.4 –0.5 –0.6 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 NRA roots, tubers and pulses NRA cereals NRA industrial Crops NRA fruit and vegetables SMOOTHED COMMODITY NRAS IN SSA 10% Nominal Rate of Assitance (%) 0% –10% –20% –30% –40% –50% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Roots, tubers and pulses Cereals Industrial crops Fruits and vegetables Source: World Bank Data Estimates of Distortions to Agricultural Incentives Summary In fact, the nature and extent of trade barriers has changed greatly over the past two decades and we have In summary, the longer run empirical evidence as pre­ witnessed a period of significant liberalization of agricul­ sented here does not seem to lead to a conclusion that tural trade, including a dramatic reduction of export taxes we need to explain the “persistence of agricultural trade and import tariffs. barriers,” as argued in some other reports. 22 FIGURE 5: Nominal Rate of Assistance to Agriculture (NRA) by RTAs and Commodity Groups—Actual COMMODITY SPECIFIC NRAS IN APEI COMMODITY SPECIFIC NRAS IN SADC 80.00% 40.00% 60.00% 20.00% 40.00% 20.00% 0.00% 1980 1985 1990 1995 2000 2005 0.00% 1980 1985 1990 1995 2000 2005 2010 –20.00% –20.00% –40.00% –40.00% –60.00% –80.00% –60.00% –100.00% –120.00% –80.00% Roots Cereals Industrial crops Fruits and vegetables    Roots Cereals Industrial crops Fruits and vegetables COMMODITY SPECIFIC NRAS IN EAC COMMONDITY SPECIFIC NRAS IN ECOWAS 40.00% 0.8 30.00% 0.6 20.00% 0.4 10.00% 0.2 0.00% 1980 1985 1990 1995 2000 2005 2010 –10.00% 0 1980 1985 1990 1995 2000 2005 2010 –20.00% –0.2 –30.00% –0.4 –40.00% –0.6 –50.00% –60.00% –0.8 Roots Cereals Industrial crops Fruits and vegetables    Roots Cereals Industrial crops Political economy of regional integration in sub-saharan africa Source: World Bank Data Estimates of Distortions to Agricultural Incentives FIGURE 6: Nominal Rate of Assistance to Agriculture (NRA) by RTAs and Commodity Groups—Smoothed COMMODITY SPECIFIC NRAS IN APEI COMMODITY SPECIFIC NRAS IN SADC 60.00% 10.00% 0.00% 40.00% 1980 1985 1990 1995 2000 2005 –10.00% 20.00% –20.00% 0.00% 1980 1985 1990 1995 2000 2005 2010 –30.00% –20.00% –40.00% –40.00% –50.00% –60.00% –60.00% –80.00% –70.00% –100.00% –80.00% Roots Cereals Industrial crops Fruits and vegetables    Roots Cereals Industrial crops Fruits and vegetables COMMODITY SPECIFIC NRAS IN EAC COMMONDITY SPECIFIC NRAS IN ECOWAS 20.00% 0.4 0.3 10.00% 0.2 0.00% 1980 1985 1990 1995 2000 2005 2010 0.1 –10.00% 0 1980 1985 1990 1995 2000 2005 2010 –20.00% –0.1 –0.2 –30.00% –0.3 –40.00% –0.4 –50.00% –0.5 –60.00% –0.6 Roots Cereals Industrial crops Fruits and vegetables    Roots Cereals Industrial crops Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa Source: World Bank Data Estimates of Distortions to Agricultural Incentives 23 24 Political economy of regional integration in sub-saharan africa FIGURE 7: Applied Weighted Mean Tariffs for Primary Products for SSA and by RTA a. Sub-Saharan Africa 16 14 12 10 8 6 4 2 0 1996–1999 2000–2003 2004–2007 2008–2011 b. By Regional Trade Agreement 25 20 15 EAC APEI ECOWAS 10 SADC 5 0 2000–2003 2004–2007 2008–2012 Source: World Bank Data Estimates of Distortions to Agricultural Incentives The policy changes after 2007 have not so much from export restrictions on cash crops (“industrial com­ returned to previous (regional) trade obstacles—since als. In fact, export taxation of cash crops modities”) to cere­ tariffs were kept low or were even further reduced—but seems to be lower than ever (with RRAs close to zero) in changed the nature of the trade interventions with a shift the past decade. In other words, the “reversal” in RRAs was Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 25 FIGURE 8: Food Price Policies of African Countries and the Rest of the World % of 47 African countries % of 71 countries outside of Africa 50% Percentage of countries 40% 30% 20% 10% 0% Reduce Increase Export Price controls/ None foodgrain taxes foodgrain stocks restrictions consumer subsidies Source: Wodon and Zaman (2008) not a return to old interventions but due to a switch in order to have a perspective on the future political economy taxation from industrial crops to cereals. constellation, and how to influence this, it is important to On average for SSA the NRA for cereals was only 5% also understand the factors that underlied the major trade lower in the late 2000s compared to the early 2000s. policy transformation that occurred over the past decades How­ ever the decline seems to be considerably stronger in African agriculture. in EAC (around –15%) and especially in ECOWAS (around –30%). Yet, these declines in NRA may be overestimated in recent years as increased input (fertilizer) subsidy 4. Political Economy programs are not captured in the NRAs and RRAs. More­ 4.1 Anti-Trade Bias and Variations in Taxation over, a significant part of staple food commodities had to Commodity Groups no policy regulations or trade restrictions throughout the entire period. There are several reasons to expect differences in NRAs Many studies claim that with a reduction in tariffs, etc., not only among countries but also among specific agri­ there has been an increase in NTMs (e.g., Kalaba 2012; cultural commodities within a country. One explanation Hoekman and Nicita 2011; Keane, Call, and Kennan 2010). relates to the stylized fact of a significant anti-trade bias However (as we will argue in more detail in section 6 of this over the past decades: exportables were often taxed while chapter) it is unclear how much impact these interventions import-com­ peting commodities were often protected by had (and in the case of standards even in what direction tariffs, a phenomenon which was general in Africa and the impact was). In fact, it is not clear whether trade suffers elsewhere (Anderson 2009). more from too many standards or from too few (efficiently A first factor is a reason similar to that underlying enforced) standards. countercyclical support (see further). Theory predicts that In the next section we use a political economy frame­ governments are more likely to support (sub-) sectors work to explain the changes in the nature and extent of with a comparative disadvantage (imports) than (sub-) trade barriers, and draw conclusions on how RTAs could sectors with a comparative advantage (exports). Since affect these in the future. Such analysis is not only impor­ benefits from market returns are lower in sectors with tant to understand the policy changes and the (lack of) a comparative dis­ advantage, those sectors’ incentives to importance of RTAs in the past, but also for the future. In seek income from government support are also relatively 26 Political economy of regional integration in sub-saharan africa higher.4 In these (sub-) sectors, returns to investment in ments cannot raise revenues from taxes on either imports lobbying activities dominate returns from market activi- or exports of these commodities. ties and so indirectly support an anti-trade bias. The second reason is related to trade but is a more Second, tariff revenues and export taxes increase general point and concerns the costs of implementing (and govern­ ment revenues, while export and import subsidies enforcing) certain policies. These costs can differ strongly require outlays. It is always less contentious for govern- depending on the nature of the commodity. For example, ments to tax than to subsidize trade: taxing raises gov- commodities which are perishable and require process- ernment revenue and, in the case of larger economies, ing (with scale economies), such as sugar, cotton, and improves their terms of trade, whereas trade subsidies do dairy products, are typically marketed through processing the opposite. compa­ nies—a point at which governments can intervene In African countries in which tax-collection institu- at relatively low cost. For the same reason, governments tions are weakly developed, trade taxes (either import can use their control over border crossings and ports as tariffs or export taxes) are often an important—or the a mechanism for lowering enforcement of tax implemen- only ­ substan­tive—source of tax revenue (Rodrik 1995). tation. However roots, tubers, and pulses are often pro- This revenue motive for governments will affect not only duced by small farmers and transacted at decentralized total RRAs but also the choice of policy instruments. If the locations, often local markets, in small volumes among tax infrastructure is less developed, governments have numerous agents. This makes it very costly for govern- greater incentives to use tariffs instead of policies such as ments to regulate, tax (or subsidize) these commodities. direct income support to assist farmers. Empirical evidence for the government-revenue motive 4.2 Political Economy of Reduced Trade is mixed. Dutt and Mitra (2010) find some support for it, Distortions 1985–2005 but Masters and Garcia (2010) and Bates and Block (2010, The previous factors explain the differences among com­ for Africa in particular) find either mixed or conflicting modity trade restrictions, but not why trade policies have evidence. changed over the past twenty-five years. However, it may be that the revenue motive has weak­ ened over time as developing countries have learned to RTAs introduce and apply value-added taxes more efficiently (Tanzi and Zee 2000) and, in more recent years, as new One explanation could be the introduction of RTAs. There information technologies have lowered the cost of provid­ is no obvious way to quantify the impact of the RTAs on ing conditional cash transfers to targeted groups (Alatas trade restrictions and other agricultural policies in a sys- et al. 2012). These factors may be elements in the signifi- tematic way with the data that are available. A simple visual cant reduction in export commodity taxation and import comparison of the NRAs/RRAs “before and after” the intro- tariffs that we documented above. duction of the RTAs (or when there were significant formal “deepenings of RTAs”) suggest that the RTAs are intro- Absence of Government Interventions in Parts duced during or after periods of liberalization rather than of the Staple Food Market preceding them. Figures 5 and 6 illustrate how NRAs were stable during A key observation is that NRAs are close to zero for the the period of SADC introduction. In EAC, NRAs in cereals staple food group of “roots, tubers, and pulses.” This were very volatile before and became more stable after­ can probably be explained by two factors. The first is the ward, and then declined in the years with high food prices. absence of trade in these commodities. Hence govern- In other commodities there was no change in the trend. For ECOWAS, the introduction and deepening of the RTA seems to have occurred when reductions in cereals NRA 4 Other factors explaining commodity differences include was already going on (and they did not prevent a rebound demand and supply characteristics. Raising tariffs on commodities around 1998–2002). For the other commodities there is no which are more important for consumers, such as staple foods, change in trend. Obviously, such visual correlation cannot will be opposed more often than will raising tariffs on commodi- show (absence of) impact, but it appears to be in line with ties which are less important as a consumption item, and vice other arguments that the RTA impact has been mostly for­ versa for producers (Anderson 1995; Swinnen 1994). Demand and supply elasticities also affect the distortions and costs of poli- mal and less so effective. In fact, it may be that RTAs were cies (Gardner 1983). part of a period of liberalization rather than the other way Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 27 around. Hoekman and Winters (2009) in fact argue that (SAPs) in Africa in the 1980s and 1990s were very contro­ most significant economic reforms within trade agreements versial. These programs often required the borrowing gov­ are typically driven by domestic purposes rather than by ernments to liberalize their policies, with the justification trade rule constraints (i.e., “most reform is unilateral”). that such changes would enable them to repay the loans RTAs, as other trade agreements, have their limita­ on schedule. Some policy reforms were reversed after the tions in what they can achieve in terms of contributing to loans were in place, but many appear to have stuck (Aki­ domestic reforms or policy consistency. This is, in particu­ yama et al. 2001; Kherallah et al. 2002). lar, in sectors where there are typically both consumers There is little quantitative empirical evidence on how and producers on both sides of the trade equation, and important the structural adjustment programs were in which have long traditions in policy interventions—as in influencing agricultural trade policies directly in Africa (or agriculture.5,6 In other words, most gains from trade can anywhere else). Swinnen, Vandeplas, and Maertens (2010), be achieved among countries with strongly different com­ using different indicator variables, do not provide causal parative advantages, something which may be less the evidence, but document that in sub-Saharan Africa, the case among neighbouring countries, especially with high introduction of the structural-adjustment programs are trade costs. correlated with a significant reduction of taxes on farmers. Hence, in line with Hoekman and Winters (2009) and They find that they are correlated with an average increase Hoekman and Kostecki (2013) we forward alternative in RRAs of approximately 20 percentage points. William­ drivers for trade policy changes and the improvement in son and Hag­ gard (1994) suggest that the most important policies for African farmers, one external and one internal: impact of the SAPs was not direct but indirect. They argue (1) liber­ alization forced by the structural adjustment pro­ that the most useful effect of these programs came not in grams in the 1980s and 1990s and (2) changes in the fun­ the form of hard conditionality (“leverage”) but rather from damental political economy equilibrium caused by growth shifting the domestic intellectual climate and public dis­ and economic restructuring, lowering of information costs, course in these countries toward favoring freer markets. and changes in governance structures. Political Reforms, Infrastructure, Information Costs, Structural-Adjustment Programs and Economic Growth and Policy Conditionality Whatever direct or indirect influence the SAPS had, their In the 1980s, international financial institutions (such as impact on reduction of taxation of farm exports has prob­ the World Bank and the International Monetary Fund) ably been helped by fundamental changes in the political started imposing policy conditions on African countries as economic equilibrium over the past twenty-five years in part of their lending. The structural-adjustment programs Africa (Anderson, Ivanic, and Martin 2013). Several African countries have experienced democra­ tization over the past decades. The implications for agri­ 5 The GATT went through almost four decades and several trade cultural trade policies are not straightforward.7 The very rounds, significantly reducing tariffs in trade in industrial goods, before agriculture was included in the GATT/WTO Uruguay Round agreement in 1992, with trade rules which had limited impact on exceptions from trade liberalization and market integration. (As a actual agricultural policies. Until today, one has not managed to consequence, a paradoxical effect of the integration of the CEFTA agree on further agricultural trade policy restrictions. countries into the EU in 2004 was the liberalization of agricultural 6 One illustration of this is the difficulty and sensitivity of effec­ trade among the CEFTA countries, with important impact on their tively integrating agriculture in virtually all trade agreements. trade in agricultural and food products.) And before EU Accession One of the earliest examples of regional trade agreements is the agriculture was one of the most sensitive areas in the EU-CEFTA 1948 Benelux agreement between Belgium, the Netherlands, and trade integration discussions (Pokrivcak 2007). Luxembourg, which had to be postponed for more than a year 7 Theoretical formulations have been advanced to explain how because of conflicts over agricultural trade rules. Similarly, it took democratization will affect public policies. Models based on the ten years after the signing of the Treaty of Rome which founded median-voter theorem predict that democracies tend to redis­ the European Economic Community in 1957 for the agricultural tribute from the rich to the poor. This is expected in democracies policy and trade rules to be implemented. In the Central Euro­ because the distribution of political power (measured by votes) is pean Free Trade Association (CEFTA), the RTA which integrated typically more equal than the distribution of income and wealth the Central European countries in the decade between the tran­ (Alesina and Rodrik 1994; McGuire and Olson 1996; Persson and sition to market economies and their integration to the EU, the Tabellini 1994). Similarly, democratic regimes could lead to trade CEFTA agreement was only agreed after all the main agricultural policy reforms if these reforms created more winners than losers commodities had been moved to appendices, providing them (Giavazzi and Tabellini 2005). 28 Political economy of regional integration in sub-saharan africa factors that make it difficult for farmers to organize politi- Information plays a crucial role in political markets, cally (such as their large population size and wide geo- orga­ nization, and policy design. Forces that change infor- graphic dispersion in many African countries) render them mation costs may cause changes in public policies, includ- potentially very powerful in electoral settings (Bates and ing agri­ cultural protection. One example is enhanced Block 2010; Varshney 1995). rural commu­ nication infrastructure, which occurs either Under autocratic regimes, governments (rulers) can through public investments (as in many high-income coun- follow their personal preferences to a greater extent in tries earlier in the twentieth century) or, more importantly selecting policies. So the impact of democratization is likely for Africa, through technological innovations and com- to depend on the previous governments’ preferences mercial distributions (as in the recent dramatic increase in such as left-wing or right-wing ideologies or their regional mobile-phone use in Africa). interests. Bates and Block (2010) show that the regional Another influencing factor is the spread of mass media backgrounds of lead­ ers in Africa significantly affected their such as television and radio (McCluskey and Swinnen policy preferences. Leaders who drew their political sup- 2010). Access to mass media empowers people politi- port from cities and semi-arid regions (as in Tanzania and cally, and a more informed and politically active electorate Ghana) seized a major portion of revenues generated by increases the incentives for a government to be respon- the export of cash crops (coffee and cocoa). In contrast, in sive (Besley and Burgess 2001; Strömberg, 2004a).8 countries where leaders drew their support from regions Mass media can also alter the political-economy mech­ where cash crops were important sources of income anisms between group size and political mobilization by (such as in Kenya and Ivory Coast), leaders employed the providing more information to larger groups (such as power of the state to defend the fortunes of their (wealthy) farmers in Africa), because of scale economies in media regions and imposed little, if any, taxation on coffee and markets, and thus enforcing their lobby power (Kuzyk and cocoa exports. McCluskey 2006). Olper and Swinnen (2013) empirically Whatever the autocrats’ preference structure, be it find confirmation that the spread of mass media has con- ideo­logical or regional, introducing democracy is likely to tributed to the reduction of taxation of farmers in develop- reduce the influence. A recent study by Olper, Falkowski, ing countries by reinforcing the influence of large groups and Swinnen (2014) using the time-series and cross-­ (farmers and rural households). sectional variation in the World Bank’s RRA data shows There has been significant economic growth in SSA that, on average, democratization contrib­ uted significantly over the past decade. Economic growth typically coincides to the reduction of agricultural taxation in developing with a rise in urban-rural income disparities, creating countries, presumably because it, on average, provided political incen­tives for farms to demand—and politicians more influence “through the power of numbers” to farm- to supply—policies to reduce that income gap. Moreover, ers and rural households. the structural changes that accompany economic devel- Improvements in rural infrastructure have affected opment alter the political costs and benefits and, thus, agricultural interests’ ability to organize for political action. adjust the political-economic equilibrium. Such shifts in Olson’s (1965) collective-action theory predicts that in poor the equilibrium have led countries to move gradually from countries, food consumers (net buyers of food) will wield taxing to subsidizing agriculture relative to other tradable more political power than farmers (and even more than sectors. the subset of net sellers of food). Consumers are often With economic growth, the costs of agricultural pro­ concentrated in cities, where political action–coordination tection also change (Anderson 1995; Swinnen 1994). With and enforcement costs are more favorable than in the rural growing incomes, the share of consumer expenditures on areas where farmers reside. However, as the economy food declines typically, which reduces urban and industrial develops—and especially, as the share of agriculture in employment declines and rural infrastructure improves— the cost of political organization for farmers decreases. 8 This influence has been found for various types of govern- This cost reduction is likely to increase the effectiveness of ment and aid programs in Africa, such as disaster relief (Francken, farmers’ representation of their interests and, as a conse- Minten, and Swinnen 2012), less corruption in public food provi- quence, of their lobbying activities (Rausser, Swinnen, and sion (Besley and Burgess 2002), and rural educational spending Zusman 2011). (Reinikka and Svensson 2005). Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 29 interests’ opposition to agricultural trade protection. In There are the­ oretical explanations10 and substantial other words, even though the share of farmers in the vot- empirical evidence that this induces governments to ing pop­ulation also declines, less opposition to protecting intervene in order to (partially) offset these market devel- farmers arises when there are fewer of them. Swinnen opments (Swinnen and de Gorter 2002). This tendency (1994) shows that under plausible assumptions, the sec- involves increasing import tariffs or export subsidies when ond of those two effects dominates. market prices decline and suspending import tariffs or The growth and concentration of agribusinesses and export subsidies and increasing export taxes when market food-processing companies, which are sometimes aligned prices rise. Hence, both exporting and importing nations with farm interests in lobbying for agricultural policies, alter their trade taxes, but in opposite directions.11 serve to strengthen pro-farm interests (Anderson 1995; These factors may explain the shift in trade policies, Swinnen 2011). If farm lobbies and agribusiness interests but they do not explain the nature and instruments if the can coalesce and are well capitalized and concentrated, policy changes. they can be an important force in orchestrating public poli- cies that benefit their interests. Policy-Making in Volatile and Uncertain Times: Fire Brigades! In times of unexpected and dramatic changes in market 4.3 Political Equilibria in Times of High conditions with potentially large welfare effects (and thus and Volatile Food Prices 2005–2013 potentially strong political implications), governments have the tendency to introduce policies quickly, not always fully We now turn to explaining the changes in the cereals understanding the implications, and then introducing fol­ markets in recent years, and the role that RTAs have (not) low-up regulations to address unexpected side-effects of played. In this we need to distinguish between the level the policies. These are examples of what I have previously of trade protection (measured NRAs) and the instruments. referred to as “Fire Brigade Policy-Making” (Swinnen 1993). We start with explaining the levels. One key factor in the (political economy of the) changes in policies is what happened on global food markets. Fig- ure 1 illustrates the well-known spike in food prices which started in 2007 and continued in the spring of 2008, the 10 Changes create political incentives to exchange government consequent fall in 2009 and the new rise in 2010 and transfers for political support. The nature of the mechanism after.9 The key point is that these price changes not only through which these changing political incentives operate has transformed the food security discussions in Africa and been modeled in various ways. For example, Swinnen (1994) has beyond, but also the political economy of agricultural trade used a politician-voter interaction model, in which differences and domestic policies, in particular in the cereals markets. in marginal utility determine political support and induce politi- cians to implement policies to counter market developments. The policy adjustments over the past decade which we Others focus on interest groups’ unequal ability to appropriate documented in section 2 are an example of what is sometimes the benefits of lobbying (Baldwin and Robert-Nicoud 2007). In called “the countercyclical bias” in agricultural trade policies. an expanding industry versus in declining industries Freund and Agricultural and food market interventions result from Özden (2008) and Tovar (2009), focus on the importance of aver- policies designed to alter the resulting distribution of sion to loss in determining political reactions in order to explain why declining sectors such as agriculture receive support and why income from what would otherwise emerge under unfet- governments alter their trade restrictions in response to volatility tered mar­ ket outcomes. Changes in food prices may cause in international prices of food products. important changes in income and welfare distribution. 11 These policy adjustments can thus exacerbate the inter- national price spike. They cause large transfers between food- exporting and food-importing countries by amplifying changes in the terms of trade, favoring food exporters during upward price spikes and food importers when prices slump. Since each country 9 Important sources on the policies during those periods are group’s action reduces the capacity of the other country group to Anderson and Masters (2009) for “low price period” and various insulate its domestic markets, little stands to be gained from such chapters in Barrett (2014), Naylor (2014), and Pinstrup-Anderson mea­ sures—and much stands to be lost (at least for one group (2014) for the “high price period.” each time, via the terms of trade) (Anderson and Martin 2013). 30 Political economy of regional integration in sub-saharan africa These features are certainly characteristic of many govern- Across the globe, regional or multilateral trade agree­ ment reactions to food price spikes in 2008 and 2010— ments to desist from such insulating actions have been see Bryan (2013) for a review and the chapters in Barrett elusive. Bound tariffs were agreed to in the Uruguay Round (2014) and Pinstrup-Andersen (2014). Agreement on Agriculture, but tariff bindings were set Studies document the shift from price measures such well above applied rates for many countries. Meanwhile, as tariffs or export taxes to quantitative measures such as food-export subsidies are still permitted (see further), and restricted export licenses or outright export bans.12 Given export taxes and import subsidies remain undisciplined by the fact that export taxes result in government revenue the WTO. and the fact that African governments have used export So what does this imply for (the political economy of) taxes on agricultural products extensively over the past RTAs? To answer this, let us first return to the basic moti­ decades, it may seem somewhat surprising that many vation for RTAs. African governments have turned to NTMs, in particular quantitative constraints, to deal with the recent food price Commitment, Flexibility, and Escape Clauses increases. The reason is that in times of uncertainty and confront­ It is important for the functioning (and the approval) of RTAs, ing an emerging crisis, governments tend to believe that as any international trade agreement, to find the right bal- quantitative measures are more likely to be effective in get- ance between commitments and flexibility (WTO 2007). ting the desired result in an uncertain environment. For There are two main reasons why commitment is example, imposing export tariffs to achieve a certain price import­ ant. The first is that without commitment to a trade level and guaranteed availability of food may appear more agree­ ment countries can be tempted to manipulate their complicated (and more risky) than imposing an outright terms of trade in order to derive economic benefits to the ban which supposedly will keep sufficient food in the coun- detriment of their trading partners. This is likely to lead to try and food prices low(er). retaliation from other countries, and thus to a decline in However, of course, this logic is too simplistic to fit trade (Bagwell and Staiger 1999; 2003). reality, as the measure itself may induce hoarding and/or The second principal reason is that commitment to lib- smuggling of agricultural products, and may thus under- eralization obligations under a trade agreement provides mine or even counteract the measure. Several studies government’s credibility (and political cover) to overcome document how such quantitative interventions (such as domestic political obstacles. By having its policy options export bans) have contributed to, rather than solved, vola- constrained due to international trade agreements, the tility and price increases in the markets (e.g., Anderson and government can make a credible announcement to liber­ Martin 2013; Jayne and Tschirley 2009). alize, signalling to domestic lobbies that it cannot afford to back down from its commitments without facing the costs of retaliation from its trading partners (Maggi and 4.4 Regional Trade Agreements: Balancing ­Rodri­ guez-Clare 1998). Commitments and Flexibility For both reasons commitment and strict rules are The observation that the African RTAs have not been able “good” and flexibility to deviate are “bad.” However, there to constrain governments turning to ad hoc interventions are other reasons why trade agreements would not be in recent years is not an African, but a global phenome- concluded (or at least would not be as “deep” in terms of non, at least among developing and emerging countries. the level of obligations) if commitments made could never The dra­matic and rapid interventions, typically through be changed. quantitative measures have not only been observed in A major argument in favour of leaving a degree of pol- African RTAs, but in many countries across the globe, such icy discretion to members is the presence of uncertainty as in China, India, Russia, and Kazakhstan, .(Barett 2014; over future developments, be they economic shocks or Sedik 2011). changing political constraints, at the time when a trade agreement is signed. Short of re-negotiating the entire agreement, an “escape clause” may allow a country to do 12 A related political economy analysis is on the impact of WTO so, even if this implies a failure to honour some of its com- on instrument choice (see e.g., Swinnen, Olper, and Vandemoor- tele 2011); and on the political economy of food standards in mitments for a limited amount of time (Bagwell and Staiger trade (Swinnen and Vandemoortele, 2009, 2011). 2005; Bagwell 2009). A temporary breach of obligations Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 31 can be efficient, as the costs for the member affected by export bans. The second category of export restrictions is an unforeseen event may exceed the benefits foregone by export taxes. Export taxes are not explicitly forbidden in its trading partners (Sykes 2006). However, such “escapes” the context of the WTO, and a review by Kim (2010) con- have to be strictly time-limited and subject to the presence cluded that many WTO member countries had used them of specific condi­tions in order to avoid moral hazard (i.e., at some point. an abuse that would destabilize the entire agreement).13 QERs are in principle forbidden under WTO rules, but Moreover, the efficiency of “escape clauses” increases there are exceptions that allow QERs to be used in excep­ with the level of uncertainty (Rosendorff and Milner 2001). tional conditions—of which food security threats, including If African countries are facing systematically higher uncer­ food price rises, is one (Korinek and Bartos 2012). tainty over the future, a generally higher level of flexibility Export restrictions are governed by Article XI of the may be appropriate. 1994 General Agreement on Tariffs and Trade (GATT). In summary, RTAs need to find a proper balance Article XI:1 imposes a general ban on quantitative between the preservation of predictability through a set of restrictions, but Article XI:2(a) makes an exception to the rigid and enforceable obligations on the one hand and the general ban by allowing “export prohibitions or restric- provision of flexibility through temporary deviations from tions temporarily applied to prevent or relieve critical commit­ ments under certain (well specified) conditions shortages of foodstuffs or other products essential to on the other. Flexibilities can be justified for a variety of the exporting contracting party”. Article XI:2(a) applies reasons and a crucial challenge for RTAs is thus to accom- not only in the case of shortages in volumes of food- modate needs for flexibility without undermining the fun- stuffs but also in the case of increases in prices, and it damental rationale/functioning of a trade agreement. allows for the exception to be country specific and vary depending on which goods are most important to the RTAs, Food Prices, and Export Restrictions country in question. When a country uses the GATT Arti- cle XI:2(a) shortage exception to justify an export restric- How does food security and food prices fit in this perspec- tion on foodstuffs it must give due consideration to the tive? It is clear from recent experiences that countries/ effect of such restrictions on the food security of food govern­ ments are willing to break trade agreement rules importing countries. Moreover, members must notify if basic needs such as food security are at play, typically the Committee on Agriculture of new export restrictions associated with very strong political pressure. They will typ- on foodstuffs and consult with affected member states ically argue that such exceptional circumstances require when implementing them. (temporary) exceptions to the trade rules. Korinek and Bartos (2012) compare RTA provisions on In line with the arguments outlined here, some trade quantitative export restrictions with those of the WTO. agreements recognize these pressures, and in order to Out of the sample of ninety-three RTAs, fifteen agree- allow the overall trade agreements to be approved or to ments contain stronger language than the WTO quantita- function, explicitly allow for this type of exceptions. For tive export restriction disciplines, while tthirty-eight are example, while the WTO prohibits the use of quantitive equal and twenty-two are weaker. Eighteen agreements export constraints in general, it allows countries to make do not mention quantitative export restrictions at all. exception under specific conditions, including when food Among the African TRAs, the COMESA as well as the prices change strongly. ECOWAS agreement contain no extra regulation regarding The WTO distinguishes between various types of export taxes and are therefore considered “WTO-equal” export restrictions, and have different rules for quantita- in this respect. At the same time, neither COMESA nor tive export restrictions (QERs), which restrict the volume ECOWAS contain anything on quantitative export restric- of exports, and export taxes, which levy a tax on exports. tions. The SADC agreement is considered a “WTO-plus” The former group of measures includes export quotas and agreement regarding export taxes, but a “WTO-minus” agreement regarding quantitative export restrictions. In summary, while the African RTAs do not constrain the introduction of QERs, this is not exceptional. The 13 A related argument is made by Grossman and Helpman restrictions on interventions such as QERs in other RTAs (1995) when they explain how a trade agreement may be politi- cally fea­sible if a few politically sensitive sectors can be excluded and in the WTO are not effective neither—or allow them from the agreement, or give extra time to be integrated. explicitly. 32 Political economy of regional integration in sub-saharan africa 5. Liberalization, Value Chains, and Vandemoortele (2011) conclude that agricultural liberalization falls between that of liberalizing countries Prices, and Agricultural in East Asia and Eastern Europe. In sub-Saharan African Performance in Africa output was 35 percent above its pre-reform level after a decade of reform. While this was considerably slower than Before drawing conclusions on the political economy of RTAs East Asia, it was much better than in Eastern European and trade policies, it may be useful to point at some of the and former Soviet Union countries in the early years of potential effects, which may not always be as expected. There liberalization. are a mixture of findings in the literature on the net effects of However, the picture is less rosy if we look at the evo­ RTAs on trade (e.g., Hoekman and Kostecki 2013). Our argu- lution of output per capita or output per worker in agri­ ments go beyond the traditional critiques of RTAs as being culture. Swinnen, Olper, and Vandemoortele (2011) show both trade creating and trade diverting. Our arguments relate that there was hardly any growth in these indicators. More- to how trade liberalization may have unexpected effects due over, the steady, but slow, growth of agriculture in sub- to the institutional organization of the value chains. Saharan Africa hides important variations among specific crops and sub-sectors. Using the disaggregation we used for the NRA analysis, one finds substantial differences in 5.1 Liberalization and Performance performance among these groups (see Table 1). Fruits and in SSA Agriculture vegetables and roots, tubers, and pulses have performed Assessment of the effects of earlier liberalization epi- better than industrial crops and cereals. Swinnen, Olper, sodes in sub-Saharan Africa typically concluded that the and Vandemoortele (2011) conclude that the lagging per- impacts were disappointing. While there was some prog- formance in cereals and industrial crops reduced average ress, the consensus appears to be that market reforms growth in sub-Saharan African agriculture. did not meet expectations (Kherallah et al. 2002; Barrett These findings are consistent with the indicators over 1997; Jayne et al. 2003). In an international comparison the past two decades—and in particular the period before of liberalization effects on performance, Swinnen, Olper, 2007. While GAO growth averaged 3.7% per year over TABLE 1: Growth of Gross Agricultural Output (GAO) between 1990 and 2012 for SSA as a Whole and for the 4 Different RTAs Growth GAO (total) (%) 1990–2012 SSA EAC APEI ECOWAS SADC Roots, Tubers, and Pulses 150.4 63.3 141.7 251.7 85.3 Cereals 106.9 94.3 154.7 158.1 86.8 Industrial Crops 91.8 171.8 385.9 88.5 223.1 Fruits and Vegetables 117.5 198.2 87.7 137.4 92.9 All crops 116.7 131.9 192.5 158.9 122.0 *Yearly Average Index Average Yearly Growth GAO (%) 1990—2012 SSA EAC APEI ECOWAS SADC Roots, Tubers, and Pulses 6.8 2.8 6.4 11.4 3.8 Cereals 4.8 4.2 7.0 7.1 3.9 Industrial Crops 4.1 7.8 17.5 4.0 10.1 Fruits and Vegetables 5.3 9.0 3.9 6.2 4.2 All crops 5.3 6.0 8.7 7.2 5.5 Source: Authors’ calculation based on FAO data Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 33 the 1990–2006 period, GAO per capita grew only by 0.4% FIGURE 9: Agricultural Exports from SSA, and agricultural labor productivity (ALP) grew by 1.5%. 1990–2005 The num­ bers in Table 2 also show that growth was much slower in cereals (0.4% growth of production per capita) 200 and industrial crops (0.1%) than for the other commodi­ ties: 1.2% for F&V and 1.9 for roots, tubers, and pulses. 150 These output variations are remarkable given the impact of liberalization on NRAs. If anything, they would Agr. Export Index predict the opposite in terms of relative performance. 100 More specifically, with significant reduction of taxation of ICs one would expect these crops to have grown fastest. 50 5.2 A Value Chain Perspective on Staple Food Performance 0 The differences in performance are, however, consistent with a more complex model of value chains, as developed –50 by Swinnen and Vandeplas (2011) and used by Swinnen, 1990 1992 1994 1996 1998 2000 2002 2004 Olper, and Vandemoortele (2011) to explain the differ­ Sugar Cotton ences in African agriculture’s reaction to trade and market Coffee, cocoa, tea Fruit & vegetables liberalization. The different reactions may be due to varying institu­ Source: WTO tional organizations within the value chains, partly reflect­ ing differences in the commodity characteristics. For example, industrial crops were strongly dependent on interlinked input arrangements both before and after the external inputs (including pesticides and fertilizer). This liberalizations. In many cases, these production systems sector grew very rapidly after the reforms (Figure 9). rely on extensive outgrower contracting schemes, with The high value in these chains sustained post-reform processors or traders providing inputs to smallholders in private investments in the sector and encouraged private return for their crop output later (see Kherallah et al. 2002; vertical coordination with quality upgrading, interlinking Poulton, Kydd, and Dorward 2006). (with both large and small farms), and input provision to However, contract enforcement is problematic in liber­ farmers. Several recent studies show how the vertical alized markets because these are typically medium-value coordination mechanisms and their spillovers and produc­ commodities (limiting the amount of surplus to be shared tivity growth effects are similar to the growth mechanisms in the system) and because side-selling is relatively easy in Central and Eastern Europe (Dries and Swinnen 2004; (compared to the case with high-value export crops), with Minten, Randrianarison, and Swinnen 2009; Maertens, many traders involved, introduction of competition, and Colen, and Swinnen 2011). associated collapse in state-controlled vertical coordina­ Interlinked contracts in cereal production are typically tion have caused disruptions in input provision to farmers ficult to enforce because cereals are low-value com­ dif­ and led to below average output and productivity growth, modities, with relatively easy sales opportunities to mul­ despite a much stronger reduction in taxation than in tiple buyers (and thus high competition). Moreover, cereals other commodity groups. are typically more easy to store than are more perishable The fruits and vegetables group includes both low-value commodities such as fruits and vegetables or some of the products for the local market and high-value products for roots and tubers. This increases the options for opportu­ export, for which the impact of the reforms is likely to be nistic behavior for cereal farmers. This has constrained quite different. Low-value fruits and vegetables for the growth in the cereal sector since the reforms. Marketing local market are produced with little or no external inputs, activities have been taken over by many small private trad­ and the main input is often labor. In contrast, high-value ers and are based on spot market transactions (Coulter fruits and vegetables for export typically require important and Poulton 2001; Fafchamps and Minten 2001). 34 Political economy of regional integration in sub-saharan africa In summary, the different experiences of these four increases the profitability of investing in cereals produc­ subsectors in sub-Saharan Africa—which are masked by tion and it enhances the capacity to enforce contracts— the average growth rates—are consistent with the general and thus access to inputs—in the cereal value chain. This arguments presented here that reliance on external inputs appears consistent with recent data on food production in and value in the supply chains—which affect the endog­ Africa, which suggest that the price increases have caused enous emergence of exchange institutions in a liberalized import­ ant adjustments in food production in SSA with dif­ environ­ ment—are crucially important for understanding ferences between commodity groups. the impact of trade liberalization in sub-Saharan Africa— First, output and productivity have clearly increased and thus far understanding the preferences for trade lib­ since 2007. This is documented by several indicators. The eralization in the political economy. average annual growth of gross agricultural output (GAO) In other words, with extensive interlinking between in SSA increased from 3.7% in 1990–2006 to 5.2% in 2007– input and output markets it is difficult to enforce contracts 2012 (see Table 2). In per capita terms, the effect comes (and thus growth) in input-intensive value chains for low out stron­ ger: GAO/capita was close to zero (0.4% aver­ and medium value commodities (unlike in high-value fruits age) over the 1990–2006 period, but increased to 2.3% and vegetables). after 2007. If one looks at agricultural labor productivity (ALP) (i.e., the ratio of GAO over labor used in agriculture), the effect is similar: it increased from an average of 1.5% 5.3 Food Price Increases, Trade, before 2007 to 3.4% after. and Performance Second, the growth response has been particularly In this value chain perspective, the recent price increases sharp in the subsectors of cereal and industrial crops, in food prices, and in particular in cereals, may have caused the sectors which were lagging behind in the 1990–2006 a “double whammy” effect in African cereals markets: it period. The three indicators in Table 3 all show that the TABLE 2: Agricultural Output and Labor Productivity (Average Annual Growth %) Gross Agricultural Output (GAO) SSA 1990–2012 1990–2006 2007–2012 Roots, Tubers, and Pulses 6.8 5.8 4.5 Cereals 4.9 3.8 7.3 Industrial Crops 4.2 3.4 3.9 Fruits and Vegetables 5.3 4.7 4.0 All Crops 4.6 3.7 5.2 Gross Agricultural Output/Capita (GAO/capital) Roots, Tubers, and Pulses 2.2 1.9 2.2 Cereals 0.9 0.4 4.7 Industrial Crops 0.4 0.1 1.6 Fruits and Vegetables 1.3 1.2 1.6 All Crops 0.7 0.4 2.3 Agricultural Labor Productivity (ALP) Roots, Tubers, and Pulses 3.7 3.1 3.3 Cereals 2.5 1.7 5.9 Industrial Crops 1.6 1.2 2.6 Fruits and Vegetables 2.9 2.5 2.7 All Crops 2.0 1.5 3.4 Source: Authors’ calculation based on FAO data Sub-sector ALP growth is an approximation since there are no subsector labor data. It is calculated as the change of the sub-sector output relative to the change of labor use in all of agriculture. Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 35 poor aggregate performance in SSA agriculture before However, since 2007 growth of imports has slowed 2006 was hiding important heterogeneity among sectors. down to 7.4% (4.6% per capita) while growth of domes­ As the GAO/capita and the ALP14 indicators clearly show, tic production increased dramatically to 7.4% (4.6% per the average growth rates were much lower in the cereals capita)—all average annual numbers over the 2007– and the industrial crops sectors (IC). However Table 3 also 2011 period. Hence, they now grow at approximately shows that these differences have been reversed since the same rate. Per capita cereal production in the mid- 2007. The average growth rate in IC is now close to that 2000s was around 99 kg per capita (average 2003– of fruits and vegetables (F&V) (GAO/capita 1.6% and ALP 2005), approximately the same as in the early 1990s, 2.6% compared to 0.1% and 1.2% before 2006). The turn­ but since the food price spikes of 2007 has increased around is most dramatic for cereals: output/capita growth to 116 kg per capita (average 2009–2011). increased from 0.4% to 4.7% per year and ALP growth b. Domestic growth has come from expansion of area, from 1.7% to 5.9%. but mostly from productivity increases. The expansion Third, if we look further into the cereal sector—the sta­ of cultivation area for cereals actually slowed down, on ple food that has received much attention during the food average, if one compares the 2007–2012 period with crisis and which has witnessed the strongest ­ turnaround— the 1990–2006 period (0.8% per year versus 2.2% we can identify some further changes (Table 3). before). However, a closer look at the trends in area a. Both imports and domestic production have increased use shows that there are three distinct periods over significantly in recent years. Over the 1990–2006 the past twenty-five years: there was a period of rapid period imports of cereals increased rapidly, while cereal area expansion in the early 1990s (5% annual growth of domestic production was slow: growth of per growth from 1990 to 1994) followed by a period of no capita imports grew at 7.6% per year while per capita expansion (–0.06% annual growth from 1994 to 2002) production was almost stagnant (0.3% annual growth). and a period of moderate expansion since 2002 (1.7% annual growth since 2002). Hence cereal area has 14 Note that subsector ALP is an approximation since we do not expanded since 2002 without a clear structural break have subsector labor data. It is the growth of subsector output in 2007. However, there is a clear increase in productiv­ compared to the growth of labor use in all of agriculture. ity after 2007. Cereal yields have increased on average TABLE 3: Growth of Imports, Production, Area, and Productivity of Cereals, 1990–2011 (%) 1990–2011 1990–2006 2007–2011 Cereals Imports Total1 13.9 14.9 7.4 Per Capita2 6.3 7.6 4.6 Cereals Production Total 4.8 3.7 7.4 Per Capita 0.7 0.3 4.6 Cereals Yields3 Total 34.6 17.4 16.6 Yearly 1.6 1.1 3.3 Cereals Cultivated Area4 Total 39.7 34.4 4.0 Yearly 1.8 2.2 0.8 1 In Millions of Tonnes 2 Kg per Capita 3 Kg per Ha of Harvested Land 4 In 1000 ha Source: Authors’ calculation based on FAO data 36 Political economy of regional integration in sub-saharan africa by 3.3% since 2007, three times the growth rate of the SSA. However, Karugia et al. (2009) find that standards and pre-2007 period (1.1%). certification accounts for 0.5% to 5% of total transfer costs and thus even less of the production price. They carefully In summary, the food price increases have induced distinguish between different “transfer costs” and find that signifi­ cant growth in SSA agricultural production and in trade permits and certifications amount to 4.93% of total particular in cereal production and in industrial crops, transfer costs in Kenya, 0.41% in Tanzania and 2.63 in sectors which were showing very slow growth in the Uganda (see Table 4) (Karugia et al. 2009). decades before. Domestic production growth in cereals According to Kalaba (2012), the most important growth now equals import growth. Per capita cereal production comes from a five-fold increase in SPS measures between has increased by more than 7% per year on average since 2000 and 2010. However, this does not seem to be sup­ 2007. The growth has come both from an increase in area ported by empirical evidence. For example, the tripartite and, mostly, from an increase in productivity. Cereal yield SADC-EAC-COMESA agreement has set up an on-line growth in recent years (3.3%) is three times higher than based system for reporting and monitoring NTMs which before the food price increases. finds that SPS issues are on fifth place in terms of trade complaints.15 As we already documented, there is significant evi­ dence for the introduction of quantitative export restric­ 6. The Role of Non-Tariff tions (export bans and restrictions on export licenses, etc). Measures and Informal Trade As mentioned above, according to Wodon and Zaman (2008), 22 percent of African countries introduced export 6.1 Non-Tariff Measures constraints in response to the food price spike in 2007. In section 3, we have documented the general liberaliza­ From various studies it appears that they have been tion of agricultural and food policies over the past decade introduced mostly in cereals, and less so in other com­ ­ despite the recent introduction of export constraints. How­ modities, although there is little systematic information on ever, several studies emphasize an increase in the use and this. the impact of NTMs in recent years. It is difficult to assess It is unclear to what extent other NTMs did increase the importance of these NTMs since there are major data (strongly). Most other measures are a mixture of SPS, constraints and interpretation problems in the reports on other types of trade standards and infrastructural and this. Major problems are (a) that NTMs are a mix of differ­ institutional deficiencies that hamper trade. Moreover, it ent policy instruments, (b) which may (not) affect different is not quite clear from the studies how much and in what commodities, (c) which may have reinforcing or offsetting way SPS have affected trade. For example, some studies effects, and (d) the effects of which are hard to measure. indicate that a significant part of these SPS measures were It is not always clear to what extent the NTM policy introduced before 2008, which was a period of significant indicators that are being used capture the effects of actual trade liberalization, reflected in a convergence of RRAs and “policies”—which are set (or changed) by governments, and NRAs toward very low numbers. possibly integrated in international trade agreements— Also, if these SPS measures were intended as (pro­ and to what extent they capture the effect of various other ducer) protectionist instruments and were/are intended to factors (institutions, infrastructure, …) which influence protect domestic producers, it is unlikely that their imple­ trade. While one can make a plausible argument that also mentation would have continued after 2008 when gov­ the “non-policy effects” can be addressed by policies, it ernments tried to lower food prices for consumers. This is clear that these are very different policies, and should be analyzed differently; both in terms of their economic effects, and in terms of the political economy mechanisms. 15 More precisely, complaints can be filed on http://www.trade­ (For example: the economics and politics of building a road barriers.org/ and the process of elimination can be followed up is quite different from one imposing export licenses, both online, making the entire process more transparent. To date, 466 in terms of the process and the implementation.) complaints have been registered of which 381 are reported to have been resolved. Most complaints concern lengthy and costly Consider the case of SPS and other standards. Cadot customs clearance procedures (55) followed by Issues related to and Gourdon (2012), using within-product regressions the rules of origin (44), Costly Road user charges /fees (32), Inad­ with country effects, conclude that on average SPS mea­ equate trade related infrastructure (23) and Issues related to sani­ sures raise domestic prices of foodstuff by about 13% in tary and phyto-sanitary measures (22). Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 37 TABLE 4: Non-Tariff Barriers (NTBs) as a Percentage of Total Transfer Costs Kenya Tanzania Uganda Weighbridges 2.41 0.97 4.25 Security 0.45 0.73 0.26 Transiting1 0.49 0 33.87 Municipal permits 3.61 2.39 2.21 Council permits 3.74 4.31 1.79 Licenses 2.75 0.37 4.46 Customs clearance 12.83 0.75 2.75 Immigration 0 0.13 0.31 Standards and certification 4.92 0.41 2.63 Road toll stations 1.42 0.35 0.63 Bribes 1.94 1.27 1.41 Transfer costs taken up by NTBs (percent) 34.56 11.68 54.57 Other transfer Costs as a percentage of total transfer costs Vehicle hire and maintenance 46.08 69.19 21.75 Loading 3.8 5.45 1.51 Off-loading 2.19 4.51 2.01 Transporter’s allowance 3.38 5.51 1.38 Other costs 10.03 3.71 18.81 Total transfer costs 100 100 100 Source: Karugia et al. 2009 1 Transiting procedures that are cumbersome, unstandardized, and costly would be inconsis­ tent with all the other observations that FIGURE 10: SPS Notifications at the WTO we see—and they would have the opposite effects of other (1995–2011) policy measures that are introduced. If the SPS were not affecting domestic consumers TOTAL AMOUNT OF SPS NOTIFICATIONS (maybe they were not used in locally consumed products— 14000 that is not clear) then they do not appear to have affected 12000 trade much since the RRAs and NRAs for industrial com­ modities, mostly exported, have continued to converge to 10000 low numbers, thus little intervention effects. 8000 Again, it seems important to take into account that the increase in SPS measures reflects a global phenomenon, 6000 not just an African development. For example, Figure 10 shows the rapid increase in SPS measures at the WTO 4000 over the past twenty years. The growing trend reflects a 2000 changed world of agricultural trade, one in which quality and safety standards of products and the enhanced regu­ 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 30/09/2011 lations (including but not only SPS) are crucial components (Swinnen and Maertens 2014). Moreover, in this perspective, various studies have argued and documented that standards, such as SPS, can just as well stimulate trade instead of hamper it (Jaffee and Source: WTO 38 Political economy of regional integration in sub-saharan africa Henson 2004). In other words, they can be a “catalyst” for take years to be visible. This is important for politicians trade, instead of a “barrier” (Maertens and Swinnen 2007). that seek to be reelected. Another is that inputs can be In any case, just arguing that an increase in SPS is an indi­ targeted to specific groups of interest (Mason, Jayne, and cator of increasing trade obstacles is not convincing. Mofya-Mukuka 2013). There is a lack of representative and comparative data (both across countries and over time) regarding policies that affect trade in inputs. The RRA and 6.2 Informal Trade NRA policy indicators are zero for almost all inputs in SSA. An important issue in understanding the effects and the As we explained earlier (see sec­ tion 3), this is probably due political economy of trade (agreements) is the role of infor­ to lack of official data. mal trade. Trade barriers may have a stronger constraining It is not clear how much (and even in which direction) effect on the officially recorded trade than on effective trade. the input NRA (and the total NRA/RRA) are biased since it In fact, several studies conclude that income bans, export appears that input markets are affected not just by input bans, and cumbersome custom procedures increase the subsidy programs but also by other government policies formal transaction costs and therefore encourages the (regulations), and some of these have opposite effects. value chain’s stakeholders to reorganize in the informal In recent years, fertilizer and seed subsidies have sector (Engel, Jouanjean, and Awal 2013).16 been used in many SSA countries (Jayne and Rashid 2013; The Economic Commission for Africa (2010) argues that NEPAD 2013) and these are benefitting farmers (increas­ informal trade is significant, in particular in some staple ing NRAs). However, studies such as the World Bank’s 2012 commodities. However, these (potential) effects are hard report on “Africa Can Help Feed Africa” and Keyser (2013; to measure since informal trade is (mostly) unrecorded— 2015) provide clear evidence on how regulations and input by definition. distribution costs (including taxes) are hurting farmers (decreasing NRAs). The net effect is not clear. Most, but not all (e.g., temporary export bans), of the 6.3 Trade Constraints for Inputs NTBs affecting trade in foodstuff (e.g., roadblocks, cumber­ Another concern is that with tariff reductions on outputs, some border formalities, corruption, dangerous borders, policies may have shifted to some extent to influencing low quality roads, etc.) affect international trade in inputs trade in inputs. From a political economy view, control over in the same way. Also, specific NTBs seem to hamper trade inputs can be important. One reason is that the results of inputs. of the provision of fertilizer manifest themselves within Cross-border movement of seeds and fertilizer is ham­ one crop season while results of investment in roads can pered by SPS and other regulations, differences in certifi­ cation and standards between countries, and the resulting issues at the borders (World Bank 2012). Infrastructural 16 For example, the Economic Commission for Africa (2010) and related issues drive up the price of fertilizer (UNCTAD Lesser and Mois-Leeman (2009) listed several reasons for the 2010). Bumb (2009) estimates that transport and distribu­ large share of informal trade in SSA: tion costs (including taxes) represents up to 50 percent of Flexibility: Many operators in informal trade find it easy to do busi­ the final fertilizer retail price in SSA while this is only 20 per­ ness compared to formal trade as they are not tied to various cent in Asian countries. Needless to say, this discourages rules and regulations as it is the case in formal trade. One of the fertilizer use. predominant features in informal trade is the flexibility of doing Another important factor restricting the movement of business. fertilizer and driving up its price is the fact that most Afri­ Transaction costs, which are typically higher in formal trade than informal trade, arising from the following, among others: high can countries insist on using their own fertilizer mix and charges in obtaining a business license, regularized employment therefore buy directly from the world market. However, of workers; compliance with government laws and regulations, markets in most African countries are too small to exploit and government taxes. economies of scale and the countries therefore end up High domestic taxes, tariffs, non-tariff barriers, and border checks paying a higher price (World Bank 2012). Cost associates where customs officials and police at roadblocks cause long with seed regis­ tration are high and additional fees apply lays. de­ for reregistering. However, infrastructure and institutional Payment systems are complex and may imply long delays in formal trading, including additional charges such as interest and service constraints appear at least as problematic. charges. Operators in informal trade are often operating with While one could argue that trade and markets in inputs small amounts of capital. seem to suffer both from too few (enforced) standards as Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 39 from too many, with institutional constraints limiting imple­ tion capabilities often translates into duplicate certifica­ mentation and enforcement, by far the most important procedures, associated with high costs. These duplicate problem appears to be performance testing requirements. procedures also raise revenue for certifying bodies, which These regulations create unnecessary and very significant creates an additional obstacle for removing them (Keyser constraints on trade on inputs such as seeds (Byerlee, 2015). In addition, these complex regulations cause addi­ et al. 2013). tional delays at the borders because border customs do For example, Keyser (2013) describes the procedures not always understand the regulations. In summary, it is for seed release in SSA. In short, the introduction of new clear that input market regulations distort trade and hurt seeds is controlled through official tests to evaluate the farmers, but there is not enough data or estimates to com­ variety’s performance. Next, the results are discussed by pare these costs for farmers with the benefits of input sub­ variety release committees. These committees normally sidies which have gone up in recent years. meet once a year but in some countries limited resources do not allow for yearly meetings. At the same time, most African countries prohibit companies to multiply or bulk 7. Conclusions and Implications seeds until the entire registration process has been completed. Various studies have come up with a series of recommen­ Consequently, it often takes up to three additional dations to enhance the functioning of the RTAs (e.g., Engel, seasons after a variety has been approved, to build up Jouanjean, and Awal 2013; Meyer et al. 2010; UNECA and the necessary stocks before the seed in question can be AU 2013). These include: sold to farmers. But even during the phase of bringing ■■ the need for better implementation of the regional the seeds into the commercial market, strict rules apply in integration agreements; order for a company to receive a certificate or license. In ■■ the need to prioritize and mainstream agreed some cases, these procedures have become more about programs; raising revenue by certification bodies than about serving local farmers. In a case study of Uganda’s seed industry ■■ to engage private sector, civil society, etc.… in a dialogue Joughin (2014) finds that impediments to developing a to ensure their cooperation and to strengthen their more competitive market can be attributed to the lack of commitment in the process; political benefits for political elites as well as to the risk ■■ enhancing monitoring and evaluating of the integration of significant losses for large farmers and domestic seed process; producers. ■■ sharing best practices through some kind of platform; As a result, many seed companies choose to register only a limited number of varieties in each country. These ■■ include stronger TBT provisions; varieties are not necessarily the ones that are most suited ■■ amending the RTAs to meet the basic requirements for the country in question but are often the ones that are of standards systems and implementation of current generally suited for each market. In other words, the cost obligations to support expanded trade opportunities; and the time that it takes to get new varieties registered directly affects agricultural production. These are all useful recommendations. However, while To illustrate this, available data from five sub-Saharan some of these recommendations are primarily technical, countries shows that between 1998 and 2010, a median several of them face the same political constraints that of 0.62 new varieties across eight major food crops per the current situation has delivered, so it appears crucial country per year were released. Compare this to South to understand how these political constraints are likely to Africa that does not require VCU performance tests but develop in the future. only “asks for one season of official DUS tests to describe Our argument here is consistent with the more broader the seed’s characteristics thereby making registration an argument made by Dercon and Gollin (2014) who argue automatic formality.” Here, a median of “45 new varieties of that it is striking that the policy debates have drawn so maize per year, 10 new varieties of beans per year, and six little on the growing empirical literature that addresses the to eight new varieties per year each of potatoes, sorghum, political economy of agricultural policy in developing coun­ sunflower, and wheat.” tries. Since the work of Bates (1981), it has been clear that A lack of agreement on standards between coun­ agricultural development strategies in Africa are closely tries as well as a mistrust in other countries’ testing and tied to larger goals of achieving political stability, mobilizing 40 Political economy of regional integration in sub-saharan africa revenues for the state, and controlling urban food prices. A Coalition for Regional Trade Liberalization They argue that the political landscape may have changed in Agriculture for the Future? for agriculture in Africa. With emerging growth, it is impor­ All these factors are likely to continue in the future, and this tant to revisit the political economy drivers of agricultural should make the opposition to export constraints stron­ policies in sub-Sa­haran Africa. ger in (potentially) agri-food exporting countries. However, this should not necessarily lead to more trade liberaliza­ A Coalition for Agriculture for the Future? tion overall, as there may also be other effects in a regional These arguments are in line with our own findings, and framework. The same forces that make export agriculture have important implications for possible political coali­ more powerful, may also make import-competing farmers tions for agricultural trade. However, the implications of stronger in lobbying governments to protect them against our analysis are not straightforward in terms of putting imports. The net effect is not obvious. together coalitions for regional trade liberalization. Historical evidence from other regions confirms these There are two key dimensions to the political economy, complex political economy developments. Forces which much in line with our analysis in section 5. One is the long- first contributed to removing trade obstacles (by removing run dimension of economic growth and structural changes taxes on agriculture), may later lead to pressure for more in infrastructure and institutions. The second is what will trade constraints—as they did historically in more devel­ happen with food prices in the future. oped countries, and more recently in emerging countries As we explained in section 5, the reduction of anti-­ as China (Anderson 2009; Gardner 1987). agricultural and food policies in developing countries dur­ Moreover, it is important to emphasize that the most ing the past decade has been caused by a combination successful RTAs were importantly driven by non-economic of factors, including the structural adjustment programs, considerations. For example, regional economic integra­ economic growth, and the shift in the political-economic tion process in Europe (be it after World War II, or after the equilibria induced by such growth, and by changes in gov­ fall of the Berlin Wall more recently) were strongly driven ernance and information structures. Reduced taxation of by geo-political strategies (Manoli 2013. Such broadly agriculture in many African countries that experienced shared regional political drive seems absent in most Afri­ income growth during recent decades is consistent with can RTAs. In fact, in RTAs such as the SADC where South the identified forces. Africa is the dominant country, the potential hege­ monic In terms of organization of political pressure, as rural ambitions of this RTA member appears to weaken, rather infrastructure improves and communications costs fall, than strengthen, strong integration in the RTA (Soko 2007). farmers become more aligned and politically more effec­ Thus, in the absence of a shared political mission for a tive. This development again contributes to a shift in the unified economic region, domestic pressure for reforms power balance in favor of rural interests. The reduction of will likely remain the main driver (Hoekman and Kostecki anti-ag­ricultural and food policies over the last two decades 2013). Hence, one should have realistic aspirations in what has been reinforced by changes in media structure and one can expect from RTAs. political institutions. In several cases, income growth has Still, the literature (and economic reasoning) points at coincided with political reforms (democratization) and some reasons for optimism. First, there is significant invest­ with the growth of commercial media. Democratic reforms ment taking place in African agriculture, both through pri­ have, on average, motivated increases in RRAs. The impact vate investments and through public funding—and both of the change in political institutions on agricultural dis­ supported by increased foreign transfers (Guariso et al. tortions is complex, but empirical evidence suggests that 2014). These investments should have some impact on democratization and the growth of commercial media may trade costs. have contributed to the reduction of taxation of agricul­ There seems to be a consensus that (non-policy) ture in African countries. trade costs remain very high due to institutional and As African economies develop further, the “agricultural infrastructural constraints. Reducing these constraints, lobby” may expand with a growing importance/role of agri­ either through public investments or institutional reforms, business and food companies—whose interests may be should have important direct economic gains but could aligned with those of farmers—expands. These more con­ also have important indirect gains as it would change the centrated and better capitalized organizations often form political economy of the RTA bargaining. Since both the powerful lobby coalitions with farmers’ interest groups. gains and the losses from regional integration would be Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 41 strengthened with lower trade costs, the political eco­ (Busch and Mansfield, SD). However, others, such as Afe­ nomic equilibrium would shift. sorgbor and van Bergeijk (2011) argue that multiple RTA While this may initially increase opposition to trade lib­ memberships may reinforce the regional integration eralization, it should ultimately contribute to more opening process. Their argument is an example of the “spaghetti since the overall gains from trade would be much bigger— bowl as building blocks” political economy argument of allowing also “losers” from trade in the short run to benefit Baldwin (2006). either through compensation, or through reallocation of production factors. Value Chains in Economics and Politics For similar reasons countries with larger differences in It is also important to consider the role of agricultural factor endorsements are likely to be the biggest gainers value chains. Value chains play a role in the performance from RTAs and should therefore be considered the poten­ of specific commodities (“the economics”)—as we have tial drivers for stronger integration (Liu 2008). documented in section 5 of the chapter. The performance Second, economic growth could stimulate deeper of specific commodities may be strongly influenced by the integra­ tion (stronger RTAs) if it contributes to enhanced institutional organization of the value chains, including the labor and capital mobility between sectors. Enhanced extent of vertical coordination and of interlinked markets. factor mobility reduces the sector specific interests and This may also contribute to explaining the strong perfor­ allows workers and capital to flow from sectors hurt by lib­ mance of the cereal sector in recent years. eralization to sectors benefiting. This will reduce the anti- However, value chains may also play an important role RTA lobbying (Maggi and Rodriguez-Clare 2007).17 in influencing policies (“the politics”) as different partners in Third, democracy movements in Africa may also the chain may reinforce each other in the political process enhance the strength of RTAs. Mansfield and Milner (2012) to support agriculture. The effect of this is likely to depend argue that autocratic governments are less likely to join on the nature of the policy intervention. Their interests RTAs (or implement them) since it constraints their abil­ may be aligned or contrary to those of farmers depending ity to dole out rents (from protectionist trade policies). on at what level the government intervenes (agricultural They argue that governments in democracies have greater products or processed food products). For example, inter­ incentives to conclude trade agreements because it may ests along the value chain may conflict on price interven­ enhance their political support base. tions as farmers benefit from high prices and processing Fourth, just as structural adjustment programs had companies may benefit from low farm prices. These com­ direct and indirect impacts via the impact on changes in panies may be in favor of trade liberalization, in particular perceptions and ideological “beliefs” on the functioning in RTAs so that they can source from different suppliers of markets and trade, so may RTAs, when implemented, across regional borders. However, while processing com­ cause opponents to (gradually) recognize the benefits of panies are likely in favor of lower agricultural prices, they RTAs, and therefore lead to a gradual strengthening of may prefer government policies that protect the markets pro-RTA political support (Rogowski 1989; Mansfield and for their processed products. In this case their interests Milner 2012). may be aligned with farmers. Fifth, there is disagreement in the literature on whether Hence, the interest in favor of trade liberalization may the participation in multiple RTAs is a good or a bad thing differ significantly across RTAs, across countries, and even for trade and economic development. One perspective along the commodities value chains. This, of course, makes is that it leads to conflicting regulatory requirements and it difficult and complex to design strategies for political unnecessary costs (Khadiagalla 2011), and that, paradoxi­ coalitions for regional trade liberalization. The most use­ cally, it creates more policy space for governments, which ful strategy therefore appears to be one which recognizes makes it more difficult for them to resist pressure from these complexities and takes this as a starting point for a interest groups to protect them from trade competition strategy which will inherently need to be region-specific. It is also important to recognize that the political econ­ omy of trade integration is fundamentally different when it concerns products where countries have very different 17 And it may also enhance the benefits for governments in com­ production and consumption patterns than when they are mitting themselves to an RTA if they value long-term economic relatively similar. Anti-trade lobbying is likely to be much gains (Maggi and Rodriguez-Clare 1998). stronger in the second case—which probably reflects the 42 Political economy of regional integration in sub-saharan africa food staple markets in Africa; while the first case probably ■■ Another measure could be to fix the time period for represents better the exports of high value F&V—where which the situational exception is granted. trade works well. ■■ RTAs could opt to make the use of situational Finally, the interaction between value chains and RTAs exceptions subject to certain procedures. This would are bi-directional. The emergence and restructuring of guarantee that countries that want to impose trade value chains themselves will be influenced by the nature restrictions based on situational exceptions have to of the RTA as it influences the potential market and sup­ consult other member countries. Furthermore, this ply base for companies in the value chain (Vandemoortele allows for an organization of the periodic review of the et al. 2012). restrictions. This is important because often, measures outlive the circumstances that gave rise to the need Food Prices and RTAs for this measure in the first place. However, in order to keep track of these procedures, a relatively high level The extent to which these fundamental changes in African of institutional development is needed, which not every societies will affect agricultural trade policies and regional RTA has achieved as yet. trade agreements will also depend on what will happen with food prices in the future. By the mid-2000s the aggre­ ■■ The formulation of conditions on the use of exceptions gate effect had caused the RRA to be close to zero, but to the general prohibition on export restrictions. More since then new measures have been introduced to protect precisely, if a country wishes to use certain restrictions, consumers. If food prices continue to be volatile there is a it will have to meet predefined conditions. One example good chance that this will contribute to continued signifi­ could be that the restriction cannot lead to a disruption cant interventions in markets for products such as cereals. of the normal channels of supply. However, one should also expect that the chaotic pol­ icy experiences following the first price spikes may subside In summary, rather than trying to prevent political lead­ and be integrated in a more predictable set of policies, as ers from reacting to price volatility in markets of staple there should be some “learning by doing” by the African food, it seems more useful to develop a strategy to make govern­ ments, and a better anticipating of some of these such reactions more predictable, more transparent, based policy changes by the private sector. (A more pessimistic on less ad hoc instruments and to integrate this explicitly view of this is that the ad hoc policy interventions have in RTAs. undermined private sector activities and made the private Finally, it is important to point out that there has not sector more reluctant to invest.) only been an impact on the volatility of food prices but It may be important to make the balance between com­ also on their average level, and that this seems to have mitments and flexibility more specific, to accommo­ date for had major implications already. With agricultural and food these (temporary) exceptions to the RTAs, and to enhance prices much higher since 2007, both trade and domestic transparency within the RTAs. This could be done by refin­ production have increased and most strongly so for some ing exceptions to the general export restrictions, either by of the lagging sectors, in particular cereals. In fact, annual defining product specific exceptions or by refining situ­ growth rates of cereal production are now three times ational exceptions. higher than before 2007; and they now match growth in Korinek and Bartos’ (2012) recommendations regard­ cereal imports—on average across SSA. Hence both trade ing the WTO process can be useful also for the African and domestic production (and productivity) have been RTAs. They argue that several measures could limit the enhanced by higher food prices. disruptions caused by the exceptional trade interventions, and provide more transparency and thereby enhance the Need for Better Information on SSA RTAs functioning and credibility of the trade agreements. These and Trade (Policies) measures include: Finally, there is a clear need to enhance information and ■■ Specifying positive lists of specific goods exempted data in this area. Information problems play a role at dif­ from the QER regulations rather than vague categories ferent levels. Overall, our study has revealed a need for of goods that are exempted and limiting the scope much bet­ ter and more representative and comparative of situational exceptions. For example, RTAs could information on the RTAs, the policies that the member agree to allow situational exceptions only for a certain countries have implemented and their effects on trade. As product or product type (e.g. foodstuff). we have docu­ mented at several places in this chapter, it is Chapter 2: Political Economy of Agricultural and (Regional) Trade Policies and Value Chain Performances in Sub-Saharan Africa 43 very difficult to draw conclusions on cause and effects and types of NTMs (e.g., SPS mea­ sures) still hide a range of dif­ to have an idea of the size of some of the policy and RTA ferent measures with different policy implications. Further­ effects because of lack of (precise) data. more, it is far from clear how these NTBs have evolved over Engel, Jouanjean, and Awal (2013) also point out that time, let alone what happened to specific NTBs. This is fur­ information asym­ metries between the private sector and ther complicated by the vast number of different NTBs that policy-makers, as well as insufficient or incorrect data fur­ exist. Although lifting them might have the same effect in ther compounds the difficulty for governments in address­ the form of reducing trade costs, tackling them will require ing trade barriers. They refer to the lack of information on different approaches. informal trade, in many countries there seems to be a lack Recently, attempts have been made to increase the of awareness of the fact that a large part of cross-border availability of data on NTBs. One example is the combined trade is informal and only a few countries collect data on effort between the World Bank and other agents, includ­ informal trade flows. However, even basic information ing UNCTAD and the African Development Bank to collect such as how much trade is taking place within and outside data on NTMs, coded according to the 2009 MAST nomen­ RTAs at a disaggregated level is not easily available. clature, for 30 different countries and 5,000 product lines. The availability of such data is not only important from However, when trying to estimate the price raising effects an analytical perspective, but can be very important also of these NTMs for different product lines, accurate price from a political perspective, both for enhancing the trade data for each product line is also needed. Today, this is not and domestic political negotiations and for improving yet the case. For example, Cadot and Gourdon (2012) find policy targeting and enforcement. In the same way that themselves limited in their analysis due to the fact that no various agricultural policy indicators (such as PSEs, trade disaggregated price data is available for different cereals. distortion indicators, other subsidy measures…) have In other words, there seem to be a need for more dis­ contributed to multilateral trade negotiations, such data aggregated data on prices and on a wider range of NTBs in and indicators could do this at the regional level. Engel, order to get a more accurate idea of what is actually happen­ Jouanjean, and Awal (2013) point out that The COMESA- ing. Note that not only the availability of the data is impor­ EAC-SADC online NTB database (www.tradebarriers.org) tant, but that the quality should equally be guaranteed. has been useful in drawing policy-makers’ attention to the scale of these barriers, with each complaint at minimum Increasing Transparency and Harmonizing discussed in tripartite forums. Trade Regulations There is certainly an area where organizations like the World Bank could play an important role. There is need Based on several case studies and a review of other stud­ for a careful reflection on the type and the nature of data ies, Keyser (2015) identifies several “clear-cut areas where that is needed, and on the institutions to process the data policy improvements or other institutional change could into useful indicators which could enhance transparency in help African countries enhance benefits of trade,” both in policy designs and trade negotiations. output and input markets. Four key recommendations of If future studies are to complement this chapter, there Keyser are: should be an attempt to structure the information collec­ 1. Better awareness and understanding of trade rules tion in order to make the data comparative for countries would reduce the confusion that exists over the within RTAs and possibly across RTAs, and develop useful requirements to move food staples from one country and easily accessible indicators. to another. 2. Dissemination of product standards by official agencies Need for Better Information on NTBs and Prices could make trade conditions more transparent. It would probably be useful to attempt to capture more 3. Adoption of rules and regulations based on the princi­ accurately the extent and effects of NTBs in both input ple of mutual recognition and equivalence.18 Given the and output markets. It is generally accepted that today, many NTBs persist. However, it is not clear to what extent these barriers are the result of policy measures aiming at 18 One especially notable barrier in agriculture is that none of the restricting trade rather than impediments resulting from regional trade blocks has a fully developed regional approach to SPS. infrastructural and institutional limitations. Even when Discussions are under way on establishing SPS protocols for each explicitly distinguishing NTMs from NTBs, the different region but none of these agreements is complete (Keyser 2015). 44 Political economy of regional integration in sub-saharan africa Alesina, A., and D. Rodrik. 1994. “Distributive Politics and Eco­ nomic Growth.” Quarterly Journal of Economics, 109(2): 465–90. Anderson, K. 1995. “Lobbying Incentives and the Pattern of Pro­ tection in Rich and Poor Countries.” Economic Develop- ment and Cultural Change, 43(2): 401–23. Anderson, K, ed. 2009. Distortions to Agricultural Incentives: A Global Perspective, 1955–2007. 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Introduction regional grouping that has achieved the highest degree of financial integration in sub-Saharan Africa. The regional- The members of the East African Community (EAC)— ization of the UEMOA financial system was shaped by the Burundi, Kenya, Rwanda, Tanzania, and Uganda—are cur- early creation of supra­national institutions such as a single rently pursuing the regional integration of their financial regional central bank to conduct monetary policy and a systems with the aim of accelerating economic growth.1 single banking commission and bank licensing regime.4 Like many other developing countries, particularly across Financial integration in the EAC, by contrast, has largely sub-Saharan Africa, the EAC countries have long had small been driven by market incentives. Rather than responding tems marked by low levels of intermedia- financial sys­ to government-led integration initiatives, banks in the EAC tion, concentrated banking sectors, and limited access to have pursued cross-border investments for over the last finance.2 Greater financial integration is expected to help two decades to pursue higher returns promised by the lib- these countries stimulate growth by enabling their banks eralizing reforms adopted in individual countries and the and non-banking institutions to increase the scale of their expansion of regional operations by non-financial firms. operations across borders, leading to greater competition, The EAC’s market-driven financial integration has evolved lower costs, and broader access of financial services.3 An asymmetrically: Kenyan banks have established subsidiar- integrated regional financial system is expected to further ies in all EAC countries, but banks from other EAC coun- stimulate growth by facilitating intra-regional trade and tries have not yet entered Kenya or any other country in positioning the EAC as a single investment destination for the region in a meaningful way. foreign direct investment. The benefits of the regional financial integration But the manner in which the EAC has moved toward emerging within the EAC have yet to be fully realized, in regional financial integration raises questions about the part, because policy coordination has lagged considerably role of regional institutions and government policies in behind evolving market realities. In 2013, EAC members shaping the expansion strategies of banks—the principal committed them­ selves to a monetary union protocol that financial institutions of the region. Such questions are calls for the estab­lishment of a regional central bank and especially salient because the EAC’s regional financial inte- single currency by 2024. However, while EAC members gration has followed a markedly different trajectory from have accepted explicit convergence criteria for their mon- the West African Economic and Monetary Union (Union etary union in the near term, there are important devel- Economique et Monétaire Ouest Africaine, UEMOA), the opment and regulatory differences that may slow their progress toward that union. Although several large Kenyan banks have been able to enter other markets, there are Leonardo R. Arriola, Department of Political Science, University of California, Berkeley and Jared Osoro, Kenya Bankers considerable barriers to greater competition, permitting Association Centre for Research on Financial Markets and the banking sector in most countries to remain highly Policy concentrated and continue charging high mark-ups on 1 South Sudan has also applied to join the EAC. 2 Patrick Honohan and Thorsten Beck. Making Finance Work for Africa. Washington, DC: World Bank, 2007. 3 Financial Sector Integration in Three Regions of Africa: How 4 Amadou N. R. Sy, “Financial Integration in the West African Regional Financial Integration Can Support Growth, Development, Economic and Monetary Union,” IMF Working Paper WP/06/214, and Poverty Reduction. Tunis: African Development Bank, 2010; Washington, D.C: International Monetary Fund, 2006; “Financial Kenya: Economic Update—Edition No. 6. Washington, DC: World Sector Integration in Two Regions of Sub-Saharan Africa,” Wash- Bank, 2012. ington, DC: World Bank, 2007. 50 Political economy of regional integration in sub-saharan africa financial services. And while EAC members have sought To accelerate growth and promote trade within the to coordinate their finance sector laws, individual govern- region, the EAC first created a customs union in 2005 ments continue to enforce regulations that impede greater that established duty-free trade, a common external tar- cross-border investment.5 iff, and common customs procedures.8 The EAC formed a This chapter proceeds by examining the evolving common market in 2010 to attain the benefits of a single dynam­ ics of regional financial integration in the EAC. It market regulated through coordinated economic policies begins by providing essential background on regional coupled with the free movement of people, services, labor, institutions and macroeconomic conditions. The chap- and capital.9 The EAC agreed to a monetary union protocol ter broadly outlines the structure of the financial system, in 2013, initiating a ten-year process of fiscal and monetary describing in particular how Kenyan-led banking has harmonization that will culminate in the establishment of a driven regional financial integration. We then examine regional central bank and single currency.10 whether the current EAC framework is cre­ ating conditions The EAC’s political institutions determine regional for greater cross-border banking expansion as well as the devel­ opment policies. The Summit of Heads of State func- challenges likely to be faced by EAC members in meet- tions as the EAC’s executive branch by setting goals and ing the convergence criteria for monetary union. We also approving policies through consensus among the leaders examine the political factors that may slow further prog- representing member states.11 The Council of Ministers— ress toward regional financial integration. comprising the minister for East African Community affairs, the attorney general, and any other minister delegated by the government of each member state—acts as the EAC’s 2. Background principal policy­ making body by issuing directives, approv- ing regulations, and overseeing policy implementation.12 2.1 Regional Institutions The work of the Council of Ministers is divided and carried The EAC is an inter-governmental organization that aims to out by sectoral councils composed of ministers responsi- promote the development of its member states through ble for policy formulation in areas such as agriculture, edu- progressive integration, leading eventually to the forma- cation, energy, finance, and health among others. tion of a single market and political federation.6 The EAC’s The EAC Treaty further provides for legislative and judi- current five members are Burundi, Kenya, Rwanda, Tan- cial oversight of the policymaking. The East African Leg- zania, and Uganda. The EAC entered into force in 2000 islative Assembly serves as the EAC’s legislative branch. after its three original members—Kenya, Tanzania, and Its representatives are selected by the national assem- Uganda—negotiated throughout the 1990s to revive an blies of member states to debate policy, enact legisla- earlier regional organi­ zation that had linked their govern- tion, and exercise oversight over other EAC bodies.13 The ments and economies between 1967 and 1977.7 Burundi East African Court of Justice functions as the EAC’s judi- and Rwanda joined in 2007. cial branch with jurisdiction over the interpretation and application of the EAC Treaty.14 However, on the whole, 5 East African Common Market Scorecard 2014: Tracking EAC Com­ pliance in the Movement of Capital, Services and Goods. Washington, 8 The Protocol for the Establishment of the East African Com- DC: World Bank, 2014. https://www.wbginvestmentclimate.org/ munity Customs Union was signed in March 2004. publications/eac-market-scorecard-2014.cfm 9 The Protocol for the Establishment of the East African Com- 6 Preamble, Article 5, and Article 11 of the Treaty for the Estab­ munity Common Market was signed in November 2009. lishment of the East African Community. 10 The Protocol for the Establishment of the East African Com- 7 According to the preamble of the Treaty for the Establishment munity Monetary Union was signed in November 2013. of the East African Community, signed in 1999 and amended in 11 Articles 9–12 of the Treaty for the Establishment of the East 2006 and 2007, the first regional organization was dissolved due African Community. to a “lack of strong political will, lack of strong participation of the 12 Articles 13–16 of the Treaty for the Establishment of the East private sector and civil society in the cooperation activities, the African Community. continued disproportionate sharing of benefits of the Commu- 13 Articles 48–65 of the Treaty for the Establishment of the East nity among Partner States due to their differences in their levels African Community. of de­ velopment and lack of adequate policies to address this 14 Articles 23–47 of the Treaty for the Establishment of the East situation.” African Community. Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 51 these institutions exercise marginal influence over EAC one-quarter the size of the South African economy, the policy formulation, which is primarily shaped through largest in Africa. The EAC members have several common inter-governmental negotiations among the governments economic characteristics, particularly as price takers in the represented within the Summit of Heads of State and the world economy and being largely dependent on the export Council of Ministers.15 of primary commodities (e.g., coffee, tea), precious met- als, and other natural resources. Nevertheless, there are considerable differences in the economic structures and 2.2 Macroeconomic Conditions performance of EAC members. The EAC economy is domi- The five EAC members are small, open economies with a nated by Kenya, which is the region’s most complex and combined nominal GDP of US$110 billion in 2013—about accounts for 41% of the region’s combined GDP, as shown in Figure 11. The respective share of the region’s GDP of the other economies for 2013 is as follows: Tanzania (30%), 15 Henry Onoria, “Botched-Up Elections, Treaty Amendments Uganda (21%), Rwanda (7%), and Burundi (2%). and Judicial Independence in the East African Community,” Jour­ Real GDP growth has varied considerably among EAC nal of African Law, vol. 54, no. 1, 2010, pp. 74–94; M. A. Mohamed members. As Figure 12 illustrates, Rwanda and Tanzania Salih, “African Regional Parliaments: Legislatures without Legisla- have attained the region’s highest growth rates since 2000, tive Pow­ ers,” in Parliamentary Dimensions of Regionalization and while Kenya and Burundi have posted the slowest. Ugan- Globalization: The Role of Inter-parliamentary Institutions, eds., O. Costa, C. Dri, and S. Stavridis, Hampshire: Palgrave Macmillan, da’s mean growth rate has slowed by nearly one percent- 2013, pp. 149–165. age point between 2000–2006 and 2013–2007. Figure 13 FIGURE 11: Nominal GDP in the East African Community 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Burundi Kenya Rwanda Tanzania Uganda Source: IMF World Economic Outlook Database. FIGURE 12: Real GDP Growth in the East African Community Rwanda Tanzania Uganda Kenya Burundi 0 1 2 3 4 5 6 7 8 9 Mean Real GDP Growth (%) 2007–2013 2000–2006 Source: IMF World Economic Outlook Database. 52 Political economy of regional integration in sub-saharan africa shows that consistently high growth rates in Rwanda, their gross national savings, as illustrated in Figure 16. This Tanzania, and Uganda have raised their mean per capita savings gap reflects the extent to which the countries rely incomes, at purchasing power parity, to close the gap with on external savings for domestic investment. The gap also Kenya, the region’s wealthiest economy. Burundi’s anemic reflects the external dimensions of domestic macroeco- growth has raised its mean per capita income only mar- nomic stability arising from exchange rate pass-through ginally. Figure 14 further indicates that macroeconomic effects on prices and inflation. stability has varied across the five EAC economies, which Foreign direct investment (FDI) flows to the region have have experienced unsynchronized episodes of inflation- more than doubled in recent years. Figure 17 shows that ary spikes and troughs. Mean annual inflation has doubled FDI flows have favored Tanzania and Uganda. Investment in Tanzania and Uganda between 2000–2006 and 2007– in these countries has been stimulated by extractive indus- 2013, but has increased less severely in Kenya and Rwanda tries such as minerals and petroleum. While Kenya has during the same periods. received con­siderably less FDI than Tanzania and Uganda, The EAC economies share two characteristics in their it has become a significant investor in neighboring coun- external position. First, all five countries generally maintain tries across several economic sectors, particularly in the a negative current account position. Figure 15 shows that finance. this deficit has widened over the past decade across the Trade among EAC members is also increasing. For EAC. Second, the five countries have a savings gap aris- example, the value of exports to Kenya from the other ing from the fact that their total investment levels exceed four economies has been steadily growing, as shown in FIGURE 13: GDP Per Capita in the East African Community 2000 1500 1000 500 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Burundi Kenya Rwanda Tanzania Uganda Source: IMF World Economic Outlook Database. FIGURE 14: Inflation in the East African Community Burundi Uganda Tanzania Kenya Rwanda 0 2 4 6 8 10 12 14 Mean Annual Inflation (%) 2007–2013 2000–2006 Source: IMF World Economic Outlook Database. Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 53 FIGURE 15: Current Account Deficit in the East African Community Rwanda Kenya Uganda Burundi Tanzania 0 2 4 6 8 10 12 14 Mean Current Account Deficit (%) 2007–2013 2000–2006 Source: IMF World Economic Outlook Database. FIGURE 16: Investment and Savings in the East African Community Tanzania Tanzania Uganda Uganda Rwanda Rwanda Kenya Kenya Burundi Burundi 0 5 10 15 20 25 30 35 0 5 10 15 20 25 Mean Investment (%) Mean Savings (%) 2007–2013 2000–2006 2007–2013 2000–2006 Source: IMF World Economic Outlook Database. FIGURE 17: Foreign Direct Investment in the East African Community 2006 2007 2008 2009 2010 2011 2012 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 Foreign Direct Investment (US$ millions) Burundi Kenya Rwanda Tanzania Uganda Source: World Bank World Development Indicators. 54 Political economy of regional integration in sub-saharan africa FIGURE 18: Kenya’s Trade with the East African Community 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 0 200 400 600 800 1000 1200 1400 1600 1800 0 50 100 150 200 250 300 350 Exports to EAC (US$ millions) Imports from EAC (US$ millions) Burundi Rwanda Tanzania Uganda Burundi Rwanda Tanzania Uganda Source: EAC Secretariat. Figure 18. Kenya’s exports to the rest of the EAC are con- Rwanda, and Uganda have appreciably smaller financial centrated in industrial materials, light manufacturing, and systems when compared to the regional average, though food processing. Given Kenya’s dominant position in the most of these countries have experienced steady progress region, the value of its exports to the other four economies in financial development since 2000. Tanzania’s financial has been growing faster, hence the widening positive trade system has grown to nearly approximate the regional aver- balance in its favor. age in that time period. Moreover, Figure 19 highlights one additional noteworthy pattern: the deepening of Tanzania and Uganda’s financial systems precedes the implementa- 3. The Financial System in the EAC tion of the EAC customs union in 2005 or the EAC com- mon market in 2010. Accelerated financial development in 3.1 Financial Development those countries is thus likely to have been initially stimu- The EAC economies have widely differing levels of finan­ lated by country-level macro­ economic or policy reforms cial development. The size and depth of the sector var- rather than regional integration. ies considerably across countries due to country-specific The divergence in financial system development macroeconomic conditions and the legacies of previous between Kenya and other EAC members is similarly vis- banking policies. Kenya, for example, is the EAC member ible in Figure 20, which shows the ratio of private credit with the most developed financial system because it has to GDP as an indicator of financial intermediation. Kenya’s maintained less statist policies than most of its neighbors, tutions play a greater role in extending credit financial insti­ permitting both domestic private firms and foreign-owned to the private sector, relative to total economic activity, banks to operate continuously for far longer than either when compared to the African average. The other four EAC Tanzania or Uganda. countries have ratios that fall below the regional average, Figure 19 reflects the divergence in financial system though most have made progress over the past decade in devel­opment between Kenya and the other EAC members. closing the gap with Kenya. Tanzania and Uganda’s finan- The figure illustrates the size of each country’s financial sec- cial systems have nearly attained levels comparable to tor as measured by the ratio of broad money (M2) to GDP, the regional average. Additionally, Figure 20 suggests that a conventional indicator of the financial system’s mon- financial deepening in Tanzania and Uganda began well etization. Kenya’s financial sector has greater depth than before the implementa­ tion of the EAC customs union in the sub-Sa­ haran African average.16 By contrast, Burundi, 2005 or the EAC common market in 2010. 3.2 Banking Sector 16 Chuling Chen, “Bank Efficiency in Sub-Saharan African Middle- EAC members may have varying levels of financial devel­ Income Countries,” IMF Working Paper WP/09/14, Washington, opment, but finance in all these countries is dominated by D.C: International Monetary Fund, 2009. banking. The banking sector in each country is relatively Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 55 FIGURE 19: Financial Depth in the East African Community: M2/GDP Kenya Tanzania 60 45 40 50 35 40 30 25 30 20 20 15 10 10 5 0 0 90 92 94 96 98 00 02 04 06 08 10 90 92 94 96 98 00 02 04 06 08 10 19 19 19 19 19 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 45 45 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 0 90 92 94 96 98 00 02 04 06 08 10 90 92 94 96 98 00 02 04 06 08 10 19 19 19 19 19 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 SSA Uganda SSA Burundi Rwanda Source: World Development Indicators. small when compared to other developing regions.17 Nev­ largest three banks shown in Figure 22. A few large banks ertheless, banking institutions are responsible for most typically dominate banking in most of Africa’s small financial of the financial intermediation that occurs in the EAC. markets, where the average market share of the three larg- Figure  21 shows bank assets—including loans, reserves, est banks was 75% in 2011. Four of five EAC members now securities, and other assets—as a share of GDP. The bank fall well below the regional average, though most remain asset pat­terns seen in Figure 21 are virtually identical to above 50%. Kenya has among the least concentrated bank- the credit provision patterns shown in Figure 20 precisely ing sectors in sub-Saharan Africa; its three largest banks because banks are largely responsible for whatever credit held 40% of banking assets in 2011. Tanzania’s banking services are available in the region. concentration declined from over 95% in the early 2000s The banking sector has become less concentrated in to 51% in 2011. Banking concentration in Rwanda declined most EAC countries over the past decade. Following earlier in the same time period from 100% to 68%. Burundi is the reforms aimed at financial liberalization and banking privat­ only EAC member where banking concentration, at 89% in ization, privately owned domestic banks now operate in all 2010, remains above the regional average. countries alongside foreign-owned and state-owned banks. Although the banking sector has become less concen­ The number of commercial banks operating in each country trated across much of the EAC, the entry of new banks has varies widely in line with financial depth, ranging from more not necessarily increased competition.18 This is evident than forty banks in Kenya to fewer than ten in Burundi. in the Lerner index scores of EAC countries shown in Fig- The entry of new banks has appreciably lessened concen- ure 23. The Lerner index measures the pricing power of tration, as is evident in the declining market share of the 18 Sarah Sanya and Matthew Gaertner, “Assessing Bank Com- petition within the East African Community,” IMF Working Paper, 17 Honohan and Beck 2007. WP/12/32, Washington, D.C.: International Monetary Fund, 2012. 56 Political economy of regional integration in sub-saharan africa FIGURE 20: Financial Intermediation in the East African Community: Private Credit/GDP Kenya Tanzania 40 25 35 30 20 25 15 20 15 10 10 5 5 0 0 90 92 94 96 98 00 02 04 06 08 10 90 92 94 96 98 00 02 04 06 08 10 19 19 19 19 19 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 25 25 20 20 15 15 10 10 5 5 0 0 90 92 94 96 98 00 02 04 06 08 10 90 92 94 96 98 00 02 04 06 08 10 19 19 19 19 19 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 SSA Uganda SSA Burundi Rwanda Source: World Development Indicators. FIGURE 21: Bank Assets in the East African Community Kenya Tanzania 60 30 50 25 40 20 30 15 20 10 10 5 0 0 90 92 94 96 98 00 02 04 06 08 10 90 92 94 96 98 00 02 04 06 08 10 19 19 19 19 19 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 30 30 25 25 20 20 15 15 10 10 5 5 0 0 90 92 94 96 98 00 02 04 06 08 10 90 92 94 96 98 00 02 04 06 08 10 19 19 19 19 19 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 SSA Uganda SSA Burundi Rwanda Source: World Bank Global Financial Database. Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 57 FIGURE 22: Banking Sector Concentration in the East African Community Kenya Tanzania 100 100 80 80 60 60 40 40 20 20 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 100 120 80 100 80 60 60 40 40 20 20 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Uganda SSA Burundi Rwanda Source: World Bank Global Financial Database. FIGURE 23: Lerner Index in the East African Community Kenya Tanzania 0.45 0.5 0.4 0.35 0.4 0.3 0.3 0.25 0.2 0.2 0.15 0.1 0.1 0.05 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 0.45 0.6 0.4 0.5 0.35 0.3 0.4 0.25 0.3 0.2 0.15 0.2 0.1 0.1 0.05 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Uganda SSA Burundi Rwanda Source: World Bank Global Financial Database. 58 Political economy of regional integration in sub-saharan africa banks as the mark-up on financial services above marginal regional average return on assets was 2.88%. In the same costs. Higher index scores, which range from 0 to 1, reflect year, banks in Kenya (4.63%) and Uganda (5.24%) posted less competition. Figure 23 shows that the market power among the highest average rates in the region. The rates in of banks in EAC countries has generally trended with the Burundi (2.65%) and Rwanda (3.09%) nearly approximated regional average for sub-Saharan Africa, which is notable the regional average in 2011, while Tanzania (1.99%) fell given the decline in banking concentration that simultane- below. In this respect, there is no evident convergence ously occurred among EAC countries. The average Lerner among EAC members: average rates of return on assets score for African countries was 0.33 in 2011, suggesting in Kenya and Uganda appear to be rising over time, but that banks priced their services 33% above marginal costs. have been steadily declining in Tanzania. Rwanda’s rates The Lerner index score for Burundi, which has the most have trended with the African average, while Burundi’s concentrated banking sector in the EAC, was 0.56 in 2011. have exhibited the greatest variability. Overall, the aver- Uganda’s index score for the same year was 0.37. Kenya’s age return on equity, as another measure of profitability, index score of 0.28 was identical to Rwanda’s (0.28) and reflects similar national trends with all EAC banking sectors similar to Tanzania’s (0.24) in 2011 despite its greater showing highly attractive rates in 2011: Uganda (37.11%), financial depth. Kenya (30.54%), Burundi (20.69%), Tanzania (19.63%), and The ability of banks in EAC countries to continue charg- Rwanda (18.81%). ing a mark-up on financial services has enabled them to One manifestation of the market power of banks in the remain highly profitable despite the entry of new banks. EAC is reflected in the interest rate spread between lending As Figure 24 shows, for much of the period since 2000 and deposit rates. Figure 26 shows that the interest rate the average return on assets in the larger EAC markets spread in EAC countries has generally been lower than the has generally exceeded the African average, which is regional average since 2000, but the entry of new banks already among the highest in the world.19 In 2011, the has not necessarily put downward pressure on spreads. While the country trend lines shown in Figure 22 suggest a 19 Honohan and Beck 2007. nearly secular decline in banking concentration in much of FIGURE 24: Return on Assets in the East African Community Kenya Tanzania 6 6 5 5 4 4 3 3 2 2 1 1 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 7 9 6 8 7 5 6 4 5 3 4 2 3 2 1 1 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Uganda SSA Burundi Rwanda Source: World Bank Global Financial Database. Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 59 FIGURE 25: Return on Equity in the East African Community Kenya Tanzania 45 90 40 80 35 70 30 60 25 50 20 40 15 30 10 20 5 10 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 90 140 80 120 70 60 100 50 80 40 60 30 40 20 10 20 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Uganda SSA Burundi Rwanda Source: World Bank Global Financial Database. FIGURE 26: Bank Lending-Deposit Spread in the East African Community Kenya Tanzania 16 18 14 16 12 14 10 12 10 8 8 6 6 4 4 2 2 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Kenya SSA Tanzania Uganda Rwanda 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Uganda SSA Rwanda Source: World Bank Global Financial Database. 60 Political economy of regional integration in sub-saharan africa FIGURE 27: Intermediation in the East African Community Kenya Tanzania 120 120 100 100 80 80 60 60 40 40 20 20 0 0 90 92 94 96 98 00 02 04 06 08 10 90 92 94 96 98 00 02 04 06 08 10 19 19 19 19 19 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 120 120 100 100 80 80 60 60 40 40 20 20 0 0 90 92 94 96 98 00 02 04 06 08 10 90 92 94 96 98 00 02 04 06 08 10 19 19 19 19 19 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 SSA Uganda SSA Burundi Rwanda Source: World Bank Global Financial Database. the EAC, Figure 26 shows that the larger number of banks FIGURE 28: Composition of Commercial Banking operating in the EAC has not consistently affected inter- Assets in the EAC, 2008–2012 est rate spreads. The spreads across the EAC appear to be converging among the largest financial markets despite 100 their varied levels of development and regulatory condi- 80 tions. In 2011, the spread was 9.42 in Kenya, 8.19 in Tanza- nia, and 8.82 in Uganda. 60 The banking sector may be able to sustain higher inter­ 40 est rate spreads partly because the proportion of deposits 20 employed in intermediation has not appreciably increased in most EAC countries. Figure 27 shows the share of total 0 bank deposits extended as credit to the private sector. In Kenya Tanzania Uganda Kenya, the level of financial intermediation has remained Loans Bonds Other relatively flat since 2000 despite otherwise improving indicators of financial depth. Between 2000 and 2011, Source: Business Monitor International. Kenya’s credit-de­ posit ratio experienced more year-on- year decreases than increases. In Tanzania, financial lib- which is typical of the broader Africa region. Figure 28 eralization and banking privatization led to an improving shows, for example, that banks in the EAC continue to invest credit-deposit ratio; it nearly doubled from 33.12% in 2000 a significant proportion of their resources in government to 61.5% in 2011. Similarly, in Uganda, the credit-deposit bonds. Figure 29 further indicates that credit from banks ratio has jumped from 46.3% in 2000 to 83.81% in 2011. to the government and state-owned enterprises (SOEs), as The limited efficiency of financial intermediation in the a share of GDP, remained relatively unchanged between EAC is related to the preference of many banks to hold 2000 and 2011 in Burundi, Tanzania, and Uganda. Banks a large share of their assets as non-private sector loans, in Kenya have accelerated their lending to government Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 61 FIGURE 29: Credit to Government and State Enterprises in the East African Community Kenya Tanzania 20 10 15 8 6 10 4 5 2 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 9 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 SSA Uganda SSA Burundi Rwanda Source: World Bank Global Financial Database. and SOEs in the same time period that government has broader patterns of economic development, the number become less directly involved in banking. Between 1990 of ATMs per 100,000 adults in 2011 varied widely among and 2000, credit to government and SOEs in Kenya grew EAC members, reflecting their divergent levels of financial by 26% from 6.55% in 1990 to 8.27% in 2000; it grew by depth: nearly ten in Kenya, five in Tanzania, four in Uganda, 41% from 9.75% in 2001 to 13.7% in 2011. three in Rwanda, and one in Burundi. 3.3 Banking Access 3.4 Nonbank Financing While EAC members have achieved greater levels of over- Capital markets in the EAC reflect the relative underdevelop­ all financial depth over the past decade, access to bank- ment of long-term financing options outside the banking ing remains limited to a small sector of the population sec­tor. As Table 5 shows, the debt and equity markets’ even when compared to the rest of sub-Saharan Africa. aggregate capitalization is about $29 billion, which is equiv- As Figure 30 indicates, relatively few adults in EAC coun- alent to 29% of the region’s total GDP in 2012. By com- tries have bank accounts. In Uganda, less than 19% of parison, the South African capital market, the largest and adults have accounts, as do 17% in Rwanda and 3% in most sophisticated in Africa, is equivalent to nearly 201% Burundi. The exception is Kenya, where bank accounts of its GDP. among the adult population has grown from 10% in 2004 The support of other financial sector players in the to 65% in 2011. intermediation process within the EAC remains limited. Figures 31 and 32 further indicate that the physi- The penetration of the insurance sector remains low while cal infrastructure of banking has expanded more slowly the pensions sector—which has potential to play a larger across the EAC than in the rest of Africa. In 2011, there role in expanding the availability of long-term funding for were approximately two bank branches per 100,000 adults regional investments—is similarly small. These sectors in Burundi, Tanzania, and Uganda, and about five branches could complement banking in accelerating the growth per 100,000 in Kenya and Rwanda. Possibly related to of finance across the EAC if the governments of smaller 62 Political economy of regional integration in sub-saharan africa FIGURE 30: Access to Banking: Bank Accounts per 1,000 Kenya Burundi 800 400 600 300 400 200 200 100 0 0 2004 2006 2008 2010 2004 2006 2008 2010 SSA Kenya SSA Burundi Uganda Burundi and Rwanda 400 400 350 350 300 300 250 250 200 200 150 150 100 100 50 50 0 0 2004 2006 2008 2010 2004 2006 2008 2010 SSA Uganda SSA Rwanda Source: World Bank Global Financial Database. FIGURE 31: Access to Banking: Bank Branches per 100,000 Kenya Tanzania 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 2004 2006 2008 2010 2004 2006 2008 2010 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 8 8 7 7 6 6 5 5 4 4 3 3 2 2 1 1 0 0 2004 2006 2008 2010 2004 2006 2008 2010 SSA Uganda SSA Burundi Rwanda Source: World Bank Global Financial Database. Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 63 FIGURE 32: Access to Banking: ATMs per 100,000 Kenya Tanzania 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 2004 2006 2008 2010 2004 2006 2008 2010 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 16 16 14 14 12 12 10 10 8 8 6 6 4 4 2 2 0 0 2004 2006 2008 2010 2004 2006 2008 2010 SSA Uganda SSA Burundi Rwanda Source: World Bank Global Financial Database. TABLE 5: Selected Capital Markets Indicators in East Africa (December 2012) Burundi Kenya Rwanda Tanzania Uganda Total Listed Companies 61 4 17 15 97 Domestic 61 2 11 8 82 Cross Listed 2 6 7 15 Corporate Bonds 13 1 5 6 25 Market Capitalization (US$ millions) Equities 14,800 1,696 8,326 6,218 31,040 Domestic 14,800 230 1,896 815 17,741 Cross Listed 1,466 6,430 5,403 13,299 Bonds 10 9,080 41 1,754 816 11,701 Government 10 8,330 39 1,660 758 10,797 Corporate Bonds 750 2 94 58 904 Source: Stock exchanges and central banks in respective markets. markets removed restrictions on the investment of Kenyan EAC’s capital market and two-thirds of all listed compa- capital in their economies. nies. However, existing disparities in market size and levels Although small by international standards and con­ of development seem to impede rather than encourage strained by limited new issues, Kenya constitutes the core beneficial integration among EAC members. Kenya has no of the EAC’s nonbank financing. It accounts for 81% of the investment restrictions and investors from the rest of the 64 Political economy of regional integration in sub-saharan africa EAC are accorded similar status as domestic investors, but foreign bank from an EAC member to be granted author- it is unclear whether investors from the rest of the EAC ity to operate in Kenya. are taking advantage of this unrestricted access. It remains Among EAC financial institutions, Kenyan banks domi­ unclear when other capital markets might be opened to nate cross-border banking. The CBK is presently the home offer similar status to investors from EAC members. In fact, supervisor of eleven Kenyan banks with cross-border bank- the policies of some EAC members inadvertently restrict ing interests in the EAC and beyond. Table 6 shows that the market access. For instance, Tanzania’s capital market is subsidiaries of Kenyan banks had a total of 282 branches marginalized by the fact that the country’s capital account across the East African region as of December 2012. This is not fully liberalized. Not only is it the only market in the represents an increase of 26.5% over the 223 branches EAC that is largely inaccessible to other regional investors, counted in December 2011. The largest number of Kenyan but Tanzanian investors are also restricted from investing branches is found in Uganda (125) and Tanzania (70). But in other regional markets. Rwanda has registered the highest growth with the number of Kenyan bank branches rising from twenty-seven in 2011 to fifty-one in 2012. Altogether, Kenyan subsidiaries had a 4. Cross-Border Banking total of 4,780 employees in the rest of the EAC along with Expansion total assets valued at about KES 266.5 billion (USD 3.10 bil- lion) of which KES 125.5 billion (USD 1.46 billion) were loans 4.1 Expansion Patterns and Incentives to customers. Total deposits amounted to KES 202.6 billion or USD 2.36 billion. The cross-border expansion of banks in East Africa has Table 6 shows that Kenyan subsidiaries account for as largely been shaped by market dynamics associated with low as 9% of the total number of banks in South Sudan (3 financial liberalization—a process that predates EAC mar- of 34 banks) to as high as 36% in Uganda (9 of 25 banks). ket integration. Beginning in the 1990s, governments Nine of the eleven Kenyan banks operating regionally have across the region began to undertake financial reforms a presence in at least two other East African countries. encouraged by the World Bank as part of the broader pro- Larger banks such as Kenya Commercial Bank (KCB) are cess of structural adjustment. This liberalization reform present in all four EAC economies as well as South Sudan. package included measures such as the privatization of Kenyan banks have also begun to expand their interests commercial banks, the strengthening banking regulation, beyond the boundaries of the EAC. I&M Bank, Kenya’s and the elimination of controls on credit, interest rates, tenth largest bank, has subsidiaries in Tanzania and and foreign exchange. As these reforms were adopted Rwanda as well as an interest in Bank One in Mauritius and across East Africa, the role of the state in the financial sec- First Merchant Bank in Malawi. Cooperative Bank of Kenya, tor receded in favor of allowing the market to allocate capi- the country’s third largest bank, first ventured into the tal in response to prices. South Sudan market before entering the rest of EAC. It has The implementation of liberalizing reforms gener- recently signaled its intention to enter the Uganda market. ally made East African markets more amenable to the Banks like KCB explicitly state that their motivation entry of foreign banks. Banks based in the Middle East, to expand operations within the EAC has been primarily India, South Africa, and Nigeria have since established driven by their client base. According to KCB chief execu- subsidiaries in Kenya and neighboring countries. Many tive Martin Oduor-Otieno, “Our customers had seen busi- foreign banks have been drawn to Kenya in particular ness opportunities in trade and investment outside Kenya because it is the largest of all markets in the EAC; it also and they needed banking services to help facilitate all that serves these banks as a base for regional management and we were the bank that provided the solution, through coordination. By the end of 2013, the Central Bank of our regional reach.”20 On 1 July 2010, the first day the EAC Kenya (CBK) had licensed seven representative offices of Com­ mon Market took effect, KCB became the first firm to foreign banks from India (2), China (1), South Africa (2), launch a new rights issue simultaneously on the four stock the United Kingdom (1), and Rwanda (1). Representative markets of Kenya, Tanzania, Rwanda, and Uganda.21 offices of foreign banks only serve as marketing and liai- son offices for their foreign parent banks and affiliates 20 Jeff Otieno, “Rights Issue Will Provide KCB with Internal Capi- and are not permitted to undertake banking business. tal,” The East African, 14 June 2010. The opening of a representative office by the Bank of 21 “Rights Issue Gives KCB First Bite of EAC Common Market,” Kigali, a Rwandan bank, is notable in that it is the first Daily Nation, 1 July 2010. Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 65 TABLE 6: Kenyan Commercial Banks Operating Across East Africa (December 2012) Uganda Tanzania Rwanda Burundi South Sudan Total Equity Bank 38 6 8 9 61 Kenya Commercial Bank 14 11 13 1 21 60 Bank of Africa 32 18 1 50 Diamond Trust Bank 27 16 4 47 Fina Bank6 7 15 22 I&M Bank 6 15 21 Commercial Bank of Africa 1 8 9 NIC Bank 1 5 6 Imperial Bank 3 3 ABC Bank 2 2 Cooperative Bank 1 1 Total Kenyan Branches 125 70 51 6 31 282 Total Kenyan Banks 9 7 4 3 3 Total Banks in Economy 25 32 15 10 34 Source: CBK 2012 Annual Bank Supervision Report and respective Central Banks Similarly, African banks from outside East Africa have banks can pursue greater profits by crossing borders to expanded their operations within the EAC to take advan- service clients who themselves are exploiting investment tage of business opportunities created by regional inte- opportunities created by progressive EAC integration. gration. In 2010, the Nigeria-based United Bank for Africa Kenyan banks also appear more likely to engage in cross- expanded its network in Kenya, Tanzania, and Uganda, border operations as com­ petition in their home market noting busi­ ness opportunities for the bank in financing intensifies, as measured by domestic bank concentration, infrastructure projects and issuing letters of credit for local and regulatory conditions improve in neighboring EAC businesses engaged in regional trade.22 Also in 2010, Togo- markets. based Eco­ bank announced expansion plans for the EAC In a follow-up study, “Determinants of Banks Expan- motivated by serving regional corporations, international sion in the East African Community,” Njoroge and Ouma organizations, and small- and medium-sized firms. Once (2014) sim­ ilarly study the entry of Kenyan banks in other the EAC permitted the free movement of goods and ser- EAC countries.24 Their findings corroborate the follow-the- vices, Ecobank introduced a money transfer system that customer logic: Kenyan banks are significantly more likely could conduct transactions across the region instantly. to expand across the EAC in tandem with growing intra- Recent empirical studies undertaken by the Kenya regional investment and trade. They further show that bank Bank­ ers Association provide insights on the regional size and efficiency, as measured by profits, are significant expansion of Kenyan banking. In “The Drivers of Cross- determinants of cross-border expansion. Larger, more Border Banking Expansion,” Kodongo and Natto (2014) efficient Kenyan banks appear to be better positioned to examine the entry of Kenyan banks in Rwanda, Tanzania, pursue higher profits in faster growing EAC economies like and Uganda.23 Their results indicate that entry decisions Rwanda, Tanzania, and Uganda. And they are more likely are shaped by a fol­ low-the-customer logic in which Kenyan to enter such countries as they achieve macroeconomic stability along with higher growth rates and lower inflation. 22 Victor Juma, “Hold Your Horses, Analysts Tell Banks on EAC Expansion,” Business Daily, 7 July 2010. 24 L. Njoroge and S. Ouma, “Determinants of Banks Expansion 23 O. Kodongo and D. Natto, “The Drivers of Cross-Border Bank- in the East African Community: An Empirical Analysis of Kenyan ing Expansion: Evidence from East Africa,” KBA Centre for Research Banks,” KBA Centre for Research on Financial Markets and Policy on Financial Markets and Policy Working Paper Series, WPS/03/14, Working Paper Series, WPS/04/14, Nairobi: Kenya Bankers Asso- Nairobi: Kenya Bankers Association, 2014. ciation, 2014. 66 Political economy of regional integration in sub-saharan africa Despite rapid expansion of Kenyan banks across EAC members may have facilitated cross-border expan- East Africa, the regionalization of the EAC financial sec- sion since 2005, foreign bank penetration began to accel- tor remains asymmetric. Ongoing market integration has erate a decade earlier as countries in the region began to opened new markets and lowered the risks associated undertake financial liberalization, including the acquisition with cross-bor­ der expansion, but banks domiciled in other of formerly state-owned banks by foreign banks. Figure 33 East African countries have not yet entered Kenya or other shows that foreign banks have dominated the banking sec- markets in a meaningful way. For example, banks from the tors in Tan­zania and Uganda since the 1990s. The pres- two other large regional economies, Uganda and Tanza- ence of foreign banks, as percentage of all banks, has nia, have failed to establish a regional presence. To date, doubled in Burundi and Rwanda since the mid-2000s to among the non-Kenyan banks in the EAC, only two Tanza- approximate the regional average for sub-Saharan Africa. nian banks, the CRDB Bank and Export Import Bank, have The relative position of foreign banks in Kenya, by contrast, established subsidiaries in Burundi and Comoros, respec- has remained relatively constant and persistently below tively. At this stage, the Rwandan Bank of Kigali’s represen- the regional average. The Kenyan pattern may reflect, in tative office in Kenya is only evaluating the prospects for a part, the competitive position of established domestic long-term presence in the country. banks. Figure 34 shows that foreign banks control a large pro­ portion of bank assets throughout the region. The share of 4.2 Host Country Impact assets owned by foreign banks in all EAC economies gen- Foreign-owned banks have long had a presence in East erally exceeds the regional average. While foreign banks Africa due to economic relationships forged during the owned an average of 29% of total bank assets across colonial era. While progressive market integration among sub-Saharan Africa in 2009, they controlled the majority FIGURE 33: Foreign Banks in the EAC Kenya Tanzania 60 70 50 60 40 50 40 30 30 20 20 10 10 0 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 100 60 80 50 60 40 30 40 20 20 10 0 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 SSA Uganda SSA Burundi Rwanda Source: Claessens and Van Horen (2014).1 1 S. Claessens and N. V. Horen. 2014. “Foreign Banks: Trends and Impact,” Journal of Money, Credit and Banking, Supplement to 46(1): 295–326. The database is available at http://www.dnb.nl/en/onderzoek-2/databases/index.jsp Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 67 FIGURE 34: Foreign Bank Assets (% Total Bank Assets) Kenya Tanzania 50 100 40 80 30 60 20 40 10 20 0 0 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009 SSA Kenya SSA Tanzania Uganda Burundi and Rwanda 100 70 80 60 50 60 40 40 30 20 20 10 0 0 2004 2005 2006 2007 2008 2009 2004 2005 2006 2007 2008 2009 SSA Uganda SSA Burundi Rwanda Source: Claessens and Van Horen (2014). of assets in Uganda (89%), Burundi (66%), and Tanzania On the other hand, foreign banks have also been found (57%). While these figures partly reflect the entry of large, to negatively affect private credit access in low-income better-capi­talized foreign banks into EAC economies, they devel­oping countries as well as countries where contract also reflect the persistently small size of domestic banks. enforce­ment is costly and credit information is limited Recent trends in Rwanda and Tanzania suggest, however, (Claessens and Horen 2014).27 Foreign banks may under- that some local banks are expanding after being effectively mine overall access to financial services by “cherry pick- recapitalized. ing” borrowers, worsening the credit pool for local banks The net impact of foreign banks on the EAC banking (Detragiache, Gupta, and Tressel 2008).28 In countries like sector remains unclear. On the one hand, foreign banks Tanzania, for example, foreign banks often concentrate on are expected to increase the provision of financial services. their activities in servicing multinational corporations and As opposed to small banks that often tend to serve niche international organizations along with the wholesale mar- segments of a market, foreign banks that maintain large ket for government securities. Moreover, although foreign operations in host countries may be more willing to lend to banks are often assumed to promote financial stability small and medium enterprises (Presbitero, Udell, and Zaz- by strengthening their local affil­iates with improved man- zaro 2014).25 Rwandan central bank officials, for example, agement and greater capital, it is also possible for foreign have attributed to extension of banking services directly banks to transmit funding shocks to their local affiliates to the increased number of commercial banks that have (Popov and Udell 2012).29 expanded branch networks in their country.26 27 Claessens and Horen 2014. 28 E. Detragiache, P. Gupta, and T. Tressel, “Foreign Banks in 25 A. F. Presbitero, G. F. Udell, and A. Zazzaro, “Home Bias and Poor Countries: Theory and Evidence,” Journal of Finance, 63, 2008, Credit Crunch: A Regional Perspective,” Journal of Money, Credit pp. 2123–2160. and Banking, Supplement to vol. 46, no.1, 2014, pp. 53–866. 29 A. Popov and G. Udell, “Cross-Border Banking, Credit Access 26 Saul Butera, “Banked Population Rise By 20 Percent,” The New and the Financial Crisis,” Journal of International Economics, 87, Times, 5 February 2010. 2012, pp. 147–161. 68 Political economy of regional integration in sub-saharan africa Kenyan banks operating in other EAC markets may ceiling on headline inflation of 8 percent; a ceiling on the encourage greater financial stability by combining the best fiscal deficit, including grants, of 3 percent of GDP; a ceiling attributes of foreign and local banks. The entry of Kenyan on gross public debt of 50 percent of GDP in net present banks not only adds to domestic competition—possibly value terms; and a foreign currency reserve cover equiva- increasing the quality of intermediation—but the close lent to 4.5 months of import cover. Other indicative criteria proximity of Kenyan subsidiaries to their headquarters include a ceiling on core inflation of 5 percent, a ceiling on may also facilitate greater access to financial services in the fiscal deficit, excluding grants, of 6 percent of GDP; and host countries, especially as credit information and con- a floor on the tax-to-GDP ratio of 25 percent. tract enforcement improve. The EAC Monetary Affairs Committee (MAC), which is comprised of the central bank governors from EAC mem- bers, is tasked with ensuring full integration of the region’s 5. Toward Greater Financial financial system. The MAC has developed convergence Integration in the EAC criteria for harmonizing central bank legal and prudential supervisory rules and practices. It has also developed a 5.1 The EAC Monetary Union bank-specific supervisory college framework to coordinate oversight for banks that maintain a significant regional The signing of the EAC’s Monetary Union Protocol in 2013 presence. For example, in October 2012, the inaugural marked an important milestone for the regional integra- supervisory college meeting for Kenya Commercial Bank tion agenda. While previous efforts aimed at promot- (KCB) included all six central banks where KCB operates. ing economic integration among EAC members focused The purpose of the meeting was to share supervisory primarily on trade and investment, the role of finance in experience, exchange analytical intelligence, and create a the integration pro­ cess largely remained on the margin collaborative supervisory framework. of inter-governmental negotiations. In accepting to form a monetary union, EAC members have recognized that an integrated financial system may be necessary to fully 5.2 The Optimal Currency Area Argument realize the benefits of their customs union and common Despite earlier protocols ensuring greater labor and cap­ market (e.g., increased competition, economies of scale, ital mobility within the EAC—important pre-conditions lower transaction costs) and thereby attain sustainable for monetary union—it remains uncertain whether the development.30 The East African Central Bank (EACB), for region’s members would constitute an optimal currency example, is envisaged in the EAC Monetary Union Proto- area.32 The pursuit of a monetary union among EAC mem- col as a supranational independent central bank that will bers would be worthwhile if a single currency permits acquire the sole right to issue currency and conduct mon- national econo­ mies to adjust smoothly and return quickly etary policy on behalf of its members. to stability after experiencing symmetrical shocks. Even if The EAC Monetary Union Protocol stipulates a set of such shocks were asymmetrical, but relatively manage- convergence criteria that at least three members must able, the benefits of a single currency would still outweigh meet at least three years before the monetary union the costs. comes into effect by 2024. The three economies can then A monetary union will be a costly arrangement for establish a single currency and a common monetary policy the EAC if shocks affect the real economy asymmetrically conducted by the EACB; others will join when they meet across members and each requires a different monetary the criteria.31 The primary convergence criteria are: a policy response. Supply-side shocks are particularly impor- tant given that their effect on the real economy could 30 See, for example, H. R. Davoodi, S. Dixit, and G. Pinter, “Mone­ shift an economy’s potential output. But the EAC has yet tary Transmission Mechanism in the East African Community: An Empirical Investigation,” IMF Working Paper WP/13/39, 2013; H.R. to fully develop mechanisms (e.g., fiscal transfers, bailout Davoodi, ed, The East African Community after Ten Years: Deepening clauses, etc.) that would enable its members to coordinate Integration, EAC Secretariat, 2012; D. Duverall, “East African Com­ responses to asymmetrical shocks. munity: Preconditions for an Effective Monetary Union,” University of Gothenburg School of Business, Economics and Law, Working Papers in Economics, No. 520, 2011. 31 The EAC Treaty provides for the principle of variable geometry whereby some community members can move faster than others 32 R. Mundell, “A Theory of Optimum Currency Areas,” The Ameri­ on some matters. can Economic Review, Vol. 51, No. 4, 1961, pp. 657–665. Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 69 The EAC’s move toward monetary union is undoubtedly flexibility to deal with problems if they emerged; (c) joining informed by the European Union’s experience in forming the euro would cre­ ate better conditions for firms making the Eurozone. The creation and maintenance of the Euro- long-term decisions to invest in Britain; (d) entry into the zone, especially since the global financial crisis that began euro would impact the competitive position of Britain’s in 2008, can provide the EAC with valuable lessons con- financial services industry, particularly London’s wholesale cerning the challenges likely to be faced in moving toward markets; and (e) joining the euro would promote higher and then sustaining convergence. For example, the con- growth, stability, and a lasting increase in jobs. In examin- vergence criteria for establishing the EAC monetary union ing such questions, British policymakers were apparently follows the basic parameters agreed to by EU members concerned by two overriding issues that EAC members for their own criteria to form the euro, that is, requiring may want to keep in mind as they move toward their mon- members to meet targets in areas like price stability and etary union, namely, that meeting convergence criteria government debt. Nevertheless, recent analyses indicate will entail significant transition costs that should not be the Eurozone economies have not been able to sustain ignored,34 and that a monetary union may also require a their convergence: all were in violation of their own con- fiscal union if it is to function optimally.35 vergence criteria by October 2012.33 It thus appears that Eurozone members, while ostensibly meeting explicit con- 5.3 The Institutional and Political Challenges vergence targets in the short run, may not have given suf- to Regional Integration ficient consideration to whether individual governments could maintain those targets in the long run, particularly Although the economic benefits anticipated from regional under crisis. This has direct relevance for the EAC monetary integration are regularly espoused by EAC members and union. Although EAC members have accepted explicit con- their development partners, there has been little public vergence targets, little attention has been paid to whether dis­cussion of how national governments plan to contend they will be able to attain those targets through sustainable with or address the institutional challenges to be faced processes or reforms. Indeed, given the evident variation when implementing the regional integration agenda. in the external balances of EAC members, one serious con- Implementing the plans for monetary union, in particular, cern is that countries with weak fundamentals may resort will ultimately require governments to relinquish some to meeting their target for foreign exchange reserves by autonomy in key areas of policymaking. As they move from having their monetary authorities intervene in the market. increasing levels of inter-governmental coordination to the Perhaps the most informative lesson the Eurozone case actual execution of a single monetary policy and a single study could impart on the EAC process concerns Britain’s financial regulatory system, EAC members must not only decision not to join the euro. While the British economy was forgo the ability to pursue unilateral policy choices, but on strong footing to be among the first to qualify to form a they must also permit regional institutions to perform their single currency, the British Treasury spent the seven-year functions across mem­ bers’ borders without political inter- transition period leading up to the Eurozone’s creation by ference. Once the EACB begins to operate as a regional applying five tests set out by the Chancellor of the Exche­ central bank, for example, EAC members will effectively quer. These tests, which directly concern the formation lose the ability to adapt monetary policy in response to of an optimal currency area, asked whether (a)  business country-specific conditions. cycles and economic structures were sufficiently compat- Given their variable records of macroeconomic sta- ible so that Britain could live comfortably with euro inter- bility and monetary discipline, EAC members could profit est rates on a permanent basis; (b)  there was sufficient from the integration process by willingly ceding a degree of economic sovereignty in exchange for greater policy cred- ibility. But for EAC regional institutions to represent a cred- 33 See the study by investment bankers Nordea [http://research ible commitment to sound policymaking, these institutions .nordeamarkets.com/en/2012/10/18/all-eur-countries-in- violation-of-their-own-convergence-criteria/]. According to this study, of all the Eurozone economies, only the so-called periph- eral economies of Finland, Luxembourg, and Estonia come closest to meeting the criteria at the time of assessment. Some studies 34 Peter Westaway, “Modelling the transition to EMU: EMU suggest that the Eurozone was never an optimal currency area in Study,” HM Treasury, 2003. the first place. See, for example, M. Furrutter, “The Eurozone: An 35 HM Treasury, “The United States as a monetary union: EMU Optimal Currency Area?” IFIER Papers, February 2012. Study” HM Treasury 2003. 70 Political economy of regional integration in sub-saharan africa must be endowed with sufficient power to exercise inde- Fiscal coordination will ultimately be a key determinant of pendent authority and regulatory enforcement—without the suc­ cess of the monetary union. As the experience of members being able to influence or reverse decisions at the Euro zone has shown, sovereign fiscal positions in a will.36 The long-term sus­ tainability of a monetary union will monetary union need to be taken into account. Individual require institutions like the EACB to pursue policies that members of a monetary union inevitably rely on fiscal pol- may occasionally conflict with the preferences of individual icy as their primary macroeconomic lever to influence the EAC members and may oblige them to take on commit- economy, using expenditure and tax measures to respond ments that they might not have made otherwise. to supply disturbances—as well as political concerns. Toward that end, EAC members must do more to con­ The case of Kenya underscores the potential political cretely specify how they plan to invest in regional institu­ challenge that governments are likely to face in conform- tion building, that is, creating regional institutions capable ing to the fiscal constraints required by monetary union. of coordinating policies, obliging compliance by national While the EAC’s monetary union protocol requires mem- authorities, and imposing sanctions when compliance is bers to meet ceilings on fiscal deficits, Kenya’s new 2010 lacking. Existing EAC protocols do not address such issues Con­ stitution has empowered county governments to make in sufficient detail. The failure to do so in the near future expenditures according to locally determined priorities. could undermine the policy credibility of regional insti- Subsequent legislation, such as the 2012 Public Finance tutions because EAC members themselves have yet to Management Act, has clarified the national government’s develop the internal governance structures or institutional ability to impose discipline in the management of county capacities necessary to ensure consistent voluntary com- resources. The national government, for example, must pliance.37 Delegating policymaking authority to regional issue formal guarantees for loans taken on by counties, institutions will prove inadequate unless accompanied and it can suspend disbursements to counties that have by constraints that prevent EAC members from rewriting taken on excessive debt. policies that prove to be politically inconvenient. Regional Nevertheless, it remains unknown to what extent institutions must also be designed to resist pressure from Kenya’s national government will be able or willing to individual members that may exercise considerable influ- impose fiscal discipline on the counties when there are ence in particular domains (e.g., Kenya in the banking political incentives not to do so. The national government sector). may fail to impose sanctions if the executive and legislative To date, however, EAC members have not undertaken branches, controlled by different political parties, do not the public debate necessary to legitimize a deepening agree on what constitutes excessive debt. Alternatively, integration process that will eventually constrain the ability national politicians may choose not to rein in spending by of governments to pursue national preferences that may their county-level counterparts if the latter can influence conflict with regional policies. In agreeing to the formation voter turnout in competitive elections. of a monetary union, EAC members have accepted conver­ Shoring up the policymaking credibility of the EAC’s gence criteria that will eventually limit their ability to use regional institutions is especially critical because individual fiscal policy to secure financing from the central bank or EAC members are likely to continue facing political incen­ public debt to fund development projects. But the fiscal tives either to deviate from the convergence criteria in deficit convergence criterion may well pose the most sig- the near term or to periodically ignore regional policies nificant challenge to EAC members. A fiscal union will not over the longer term. And relinquishing the option to do accompany the EAC monetary union, but it is now common so may prove to be politically costly. Election-driven pub- practice for the budgets of the five EAC partners to be pre- lic debt in Uganda represents a case in point. During the sented on the same day. This is an act beyond symbolism. 2011 national elections, for example, the Ugandan parlia- ment approved a supplementary budget of approximately $260 million that international observers and civil society 36 Henrik Jensen, “Credibility of Optimal Monetary Delegation,” representatives allege was mainly used to finance the rul- American Economic Review, vol. 87, no. 5, 1997, pp. 911–920; Paul ing party’s campaign.38 R. Masson and Catherine Pattillo, “Monetary Union in West Africa: An Agency of Restraint for Fiscal Policies?” Journal of African Econo­ mies, vol. 11, no. 3, 2002, pp. 387–412. 37 Dominique M. Guillaume and David Stasavage, “Improving 38 European Union Election Observation Mission, “Uganda 2011 Policy Credibility: Is There a Case for African Monetary Unions?” Elections: Improvements Marred by Avoidable Failures,” Prelimi- World Development, vol. 28, no. 8, 1999, pp. 1391–1407. nary Statement, 20 February 2011, Kampala. Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 71 Observers note that $41 million of the supplementary heads of government where policy goals are issued, there budget allocated to the president’s office, which is exempt is a Council of Ministers made up of ministers for regional from the legal prohibition on the use of public resources cooperation from each member and a Coordinating Com- during elections, and that “nearly 330 [ruling party] candi- mittee comprising perma­ nent secretaries from each mem- dates were each given UGS20 million ($8,500) as campaign ber. However, since these bodies meet on average only funding within days of Parliament endorsing the supple- twice per year, the executive organ primarily responsible mentary budget.”39 Subsequent public statements by Bank for policy management is the EAC Secretariat. It not only of Uganda Governor Emmanuel Tumusiime-Mutebile sug- oversees the day-to-day admin­ istration of regional affairs; gest that the central bank may have been pressured into it is also mandated to undertake policy coordination and issuing new treasury bills to finance the supplementary resource mobilization. budget.40 The Bank of Uganda’s record suggests it may not But the Secretariat cannot successfully manage the have been the first time that it had engaged in politically accelerating integration process under current conditions. motivated financ­ ing despite its constitutionally guaranteed Since its establishment under the terms of the EAC Treaty independence.41 in 2000, the Secretariat has taken on additional responsi- EAC members will be reluctant to relinquish their policy bilities associated with the implementation of the customs autonomy in favor of greater regional integration if the union in 2004, the common market in 2010, and the mon- polit­ ical costs (e.g., losing the power to use fiscal instru- etary union in 2013. For example, according to the 4th EAC ments to address political problems) are perceived to Development Strategy (2011/12—2015/16), the Secretar- considerably outweigh the economic benefits. This is a pos- iat is responsible for helping to implement all ten strategic sible scenario. The analysis of Debrun, Masson, and Pattillo interventions in customs administration, all nine strategic (2011) suggests that the net benefits of monetary union interventions in trade facilitation, and nine of twelve stra- are likely to vary across coun­ tries because greater mone- tegic interventions for realizing the monetary union. The tary stability will not uniformly offset the costs derived from Secretariat also provides essential functions for the East output shocks, yielding some gains for Burundi and Kenya, African Legislative Assembly and the East African Court of but smaller gains for Rwanda and Uganda and even small Justice. losses for Tanzania.42 It thus remains to be seen whether The Secretariat’s capacities have not been enhanced national authorities will be able to overcome the strong or its resources increased to keep pace with its growing domestic political incentives to delay full implementation mandate. This is a longstanding problem. The 3rd EAC of the EAC regional framework. Development Strategy (2006–2010) specifically noted: “The Secretariat has not been adequately staffed in terms of professional staff to undertake research, management and 5.4 Empowering the EAC Secretariat monitoring and evaluation of the tasks outlined in the Sec- EAC members have sought to meet the challenge of ond EAC Development Strategy. Most of the staff is over- deepen­ ing regional integration by increasing their coor- stretched and not able to be as productive as is required dination at the executive level. Besides the Summit of for the implementation of all areas of the Strategy” (p. 20). While the Secretariat has since been able to expand and train up its staff, it continues to lack the capacity to effi- 39 Roger Tangri and Andrew M. Mwenda, The Politics of Elite Cor­ ciently carry out the multiple operations demanded by EAC ruption in Africa: Uganda in Comparative African Perspective. New members. As one example, the Secretariat does not have York: Routledge, 2013, p. 117. the analytical or institutional capacities necessary to ade- 40 Isaac Imaka and Stephen Otage, “I was misled into funding quately support the MAC in verifying whether members 2011 polls, says Mutebile,” Daily Monitor (Kampala), 13 November are meeting the convergence criteria for monetary union. 2014; Andrew M. Mwenda, “Mutebile’s Revelations about 2011 Elections,” The Independent (Kampala), 24 November 2014. To fully realize the Secretariat’s potential as a regional 41 Tangri and Mwenda 2013; Daniel K. Kalinaki, “Mutebile lifts the institution, EAC members should empower it with greater lid on patronage and electoral financing in Uganda,” The East Afri­ cen­ tralized policymaking authority. Its main function at pres- can, 15 November 2014. ent is to coordinate the policies of national governments 42 Xavier Debrun, Paul R. Masson, and Catherine Pattillo, “Should and carry out the collective decisions of EAC members. Yet, African Monetary Unions Be Expanded? An Empirical Investiga- tion of the Scope for Monetary Integration in Sub-Saharan Africa,” in practice, the Secretariat has little power to compel imple- Journal of African Economies, vol. 20, AERC Supplement 2, 2011, mentation by national authorities. Endowing the Secretariat pp. ii104–ii144. with the legal power to make certain decisions and enforce 72 Political economy of regional integration in sub-saharan africa regulations would enable it to overcome cumbersome pro- (47% of the EAC total budget) in 2009 to more than $76 cedures now associated with decentralized monitoring and million (61% of the EAC total budget) in 2014. But the Sec­ implementation which have unnecessarily slowed the inte- retariat cannot be expected to consistently carry out its gration process. Strengthening the Secretariat in this respect operations when donor funding is inconsistent. Consider would further reinforce the credibility of the broader inte- the Partnership Fund established by donors specifically to gration process, especially if the Secretariat were to acquire coordinate support for the Secretariat’s operations. The the capacity to represent EAC-wide interests in international pool of resources has grown from less than $650,000 in negations concerning issues such as trade and investment. 2006/07 to over $6 million in 2012/13. Nevertheless, despite EAC members should empower the Secretariat by the Partnership Fund’s growth over time, large year-to-year securing more sustainable funding for its operations. The changes in funding levels can present the Secretariat with EAC as a whole has become progressively dependent on problems. The Partnership Fund provided the EAC with donor resources to undertake regional integration. As Fig- over $8 million in 2010/11, but the funding dropped by over ure 35 shows, the EAC budget has grown from less than a third to nearly $5 million the following year. Moreover, not $20 million in 2005 to more than $124 million in 2014. all donors are committed to consistently replenishing the At the same time, donor funding for the EAC budget has pool of funds. Among the Partnership Fund’s ten donors, grown faster than funds provided by EAC members them- only one country—Germany—has contributed every single selves. By 2011–2014, donors provided an average of two- year between 2006/07 and 2012/13. In the last year, only thirds of the total EAC budget. five of ten members contributed to the pool. The EAC’s reliance on donor funding is problematic EAC members must not only secure alternative mecha­ because an increasing proportion of those funds are nisms for funding the Secretariat, but they must also com- required for the Secretariat’s core operations. The Secre­ mit more of their own resources to the institution if they are tariat’s budget has nearly tripled from about $25 million to assure themselves complete ownership of its expanding FIGURE 35: EAC Budget and Funding Sources 160 140 EAC Budget (millions) 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 100% 90% 80% Funding Source (%) 70% 60% 50% 40% 30% 20% 10% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Donors EAC Members Source: East African Community Secretariat. Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 73 operations. The EAC’s existing plans for resource mobili­ that included representatives from the banking sector to zation continue to excessively depend on donor aid and design and implement its financial development plan. And external grants. For example, according to the minutes of in 2010 the Ugandan government increased capital require- the Partnership Fund Steering Committee meeting held ments in order to remain in line with other EAC members.44 in June 2013, EAC members planned to contribute only But even as regional financial integration accelerates $62,800 out of the $1.6 million budgeted for implementation within the EAC, there remain considerable challenges that of the monetary union protocol in 2013/14; donors provided may stall the integration process at later stages. There are the remaining 96% of funds. Such arrangements will have to obvious challenges to coordinating policy reforms among change if the Secretariat is to become a credible institution countries with widely varying levels of macroeconomic sta- capable of managing the EAC’s deepening integration. bility and financial development. Yet, unless EAC members begin to address the institutional and policy gaps among them in a coordinated fashion—rather than relying on mar- 6. Persistent Policy Divergence ket incentives to sustain the momentum of integration— they are likely to lose out on future business opportunities The creation of a common market that provides for the made possible through greater integration. free movement of capital and services, coupled with the Consider, for instance, the market for mobile money implementation of a monetary union protocol, has enabled services. Kenya and Tanzania are two of the global frontrun­ EAC members to make steady progress toward deepening ners in the use of mobile money transfers, but cross-bor- regional financial integration. The EAC integration frame- der mobile money services currently only occur on a small, work is facilitating the work of central bank officials from unreg­ ulated scale. Service providers are aware of the poten- across the region in harmonizing banking regulations, tial revenues to be made from tapping the growing volume of sharing supervisory information, and participating in joint trade between people living on both sides of the border, but exam­ inations of banks that operate in multiple countries. they are reluctant to expand in the absence of an integrated The most recent example of progress made toward the legal framework. Tapping this particular market points to the creation of a single market in financial services is the suc- complexities that national authorities will confront as they try cessful 2013 launch of the East African Payment System to forge a set of common regulations to be applied equally (EAPS) for cross-border payments in real time. The EAPS in all countries. Policies and regulations for mobile money stems from a decision taken by the EAC’s Monetary Affairs services will not only be shaped by negotiations among cen- Committee (MAC) requiring central bank officials to estab- tral bank authorities, but also through negotia­ tions between lish a mech­ anism for connecting otherwise fragmented them and communication sector regulators as they consider payment and settlement systems. The EAPS is now facili- technical issues such as system security as well as legal ques- tating payments between Kenya, Tanzania, and Uganda tions concerning anti-money laundering requirements. and will eventually be joined by Burundi and Rwanda. Perhaps the most difficult challenge to future financial The EAC integration framework is also having a direct integration stems from the persistent policy differences impact on the policy decisions taken by coordinating within the EAC. While all members of the EAC participate in the reforms undertaken by individual governments. For the common market and have agreed to move toward mon- example, at a 2005 meeting of the MAC, the central bank etary union, each country faces internal political constraints governors of Kenya, Tanzania, and Uganda agreed to coor- that may impede the adoption of necessary sectoral reforms, dinate plans for deepening financial sector development especially as they perceive different trade-offs between the and integra­ tion. After that 2005 MAC meeting, Uganda costs and benefits of further integration. According to Booth moved to lift its temporary moratorium on the licensing of et al. (2014), reforms may lack sufficient political support if new banks in 2007 and then launched a five-year financial they threaten rents tied to the clientelistic networks that development plan that included the licensing of new banks structure politics in most East African countries.45 to encourage greater competition in the sector as well as greater access to services.43 The Bank of Uganda estab- lished a Financial Markets Development Committee (FMDC) 44 Sylvia Juuko, “Regional Banks in Critical Reforms,” The New Vision, 19 May 2010. 45 David Booth, Brian Cooksey, Frederick Golooba-Mutebi and Karuti Kanyinga. East African prospects: An update on the political 43 “Country Launches EAC Financial Markets Plan,” East African economy of Kenya, Rwanda, Tanzania and Uganda. Overseas Devel- Business Week, 14 September 2008. opment Institute. May 2014. 74 Political economy of regional integration in sub-saharan africa Kenya is the EAC member most likely to continue pro­ Tanzania is the country where further financial integra- moting the agenda of regional financial integration. Kenyan tion is most likely to be resisted. Juma Mwapachu, former banks and insurance companies have already directly ben- EAC Secretary General, has publicly stated that Tanzania efited from liberalized rules on the movement of capital actively “blocks or delays decisions towards deepening and services, so the Kenyan government has an incen- or widening EAC integration.48 Booth et al. (2014) suggest tive to continue advocating for the continual elim­ ination that consistent reform implementation in Tanzania has of other barriers to the cross-border expansion of finan- been hindered by a combination of factional competition cial services. Some analysts suggest that there is also a within the ruling party, Chama Cha Mapinduzi, and contin- political basis for Kenya’s proactive position on financial ued ideological resistance to economic liberalization. The integration. Booth et al. (2014, 17) claim that the financial Tanzanian government’s resistance to integration stems, in sector particularly benefited from improved government part, from one of the main causes that led to the collapse of treatment after the country’s regime transition in 2002.46 the first East African Com­munity in 1977—namely, the fear Key investors in the private banking sector also happen to of economic dominance by Kenyan firms. While the Tanza- be business partners and political allies linked to former nian government claims it remains committed to the EAC President Mwai Kibaki and his close associates. integration process, the government’s relations with Kenya, Uganda has largely pursued a pro-integration posi­ tion Rwanda, and Uganda became strained in 2013 over plans similar to Kenya’s, as long-ruling President Yoweri Musev- to accelerate regional integration. Tanzania’s representa- eni has encouraged the development of the private sec- tives, for example, refused to attend certain EAC meetings tor along with greater foreign investment. However, the in protest.49 At the same time, Tanzania is perhaps the EAC prevalence of clientelistic politics in the country has made member most actively seek­ ing to diversify its economic ties, the implementation of policy reforms inconsistent, as as it continues to pursue commitments through the South- local entrepreneurs and their political allies vie for explicit ern African Development Community (SADC). prefer­ential treatment by the state or implicit exemptions The policy distance among the largest EAC members secured through corruption.47 Under such conditions, even toward greater financial integration is most evident in their if Uganda accepts to undertake additional policy reforms de jure capital controls. Figure 36 presents the financial to achieve greater financial integration, it remains in doubt whether those policies will be consistently implemented. 48 Quoted in Booth et al., 2014, p. 55. 49 Muthoki Mumo, “EAC wobbles, but stays on its feet,” Daily Nation, 30 December 2013; Daniel K. Kalinaki, “Members pull 46 Booth et al., 2014, p. 69. apart: Is this the beginning of the end of EAC?” The East African, 47 Aili Mari Tripp, Museveni’s Uganda: Pardoxes of Power in a Hybrid 2 November 2013; “Tanzania officially renounces ‘coalition of the Regime. Boulder, CO: Lynne Rienner, 2010. willing,’” The East African, 21 October 2013. FIGURE 36: Financial Openness in EAC Countries 1 0.8 0.6 0.4 0.2 0 90 91 92 93 94 95 96 97 98 99 00 01 03 04 05 06 07 08 09 10 11 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 SSA Kenya Tanzania Uganda Note: The Chinn-Ito index of capital account openness is normalized between zero and one. Higher values indicate greater openness in cross-border capital transactions. Source: Chinn and Ito (2008). Chapter 3: Political Economy of Financial Sector Integration in the East Africa Community 75 openness index scores for Kenya, Uganda, and Tanzania screening of borrowers, Tanzania has made no progress along with the regional mean for sub-Saharan Africa. The in this respect. Burundi and Rwanda are not shown in Fig- Chinn-Ito financial openness index is based on informa- ure 37, but the trend line for the former follows the Tan- tion found in the International Monetary Fund’s Annual zanian pattern, while the trend line for the latter shows Report on Exchange Arrangements and Exchange Restrictions considerable improvement on the scale seen in Uganda. (AREAER), including restrictions on current account trans- Since the improvement in Rwanda and Uganda’s credit actions and capital account transactions. The index thus information index scores coincide with the establish­ ment serves as a proxy for policy intentions.50 In this respect, two of the EAC customs union, it is notable that no such devel- patterns are particularly noteworthy. First, there is a wide opment is seen in Tanzania. gap between the more liberal financial regimes of Kenya EAC members are not consistently implementing the and Uganda and Tanzania’s more restricted financial policies required to make their customs union and com- regime. Although not reported in Figure 36, both Burundi mon market a reality, let alone create the necessary condi- and Rwanda have more restricted financial regimes that tions for establishing a monetary union. The World Bank’s are closer to the Tanzanian position. Second, despite the East African Common Market Scorecard has measured the implementation of the EAC’s customs union and common degree of legal compliance with obligations undertaken by market, there is no evidence of movement toward greater EAC members to liberalize the cross-border movement of financial openness in Tanzania. capital, services, and goods.51 In examining 683 laws and The intra-EAC differences are similarly apparent in regulations relevant to the common market, including 124 the steps taken by these countries to expand access to focused on the movement of capital, Scorecard research- credit information. Figure 37 shows the depth of credit ers find that, overall, EAC members continue to enforce information index scores for Kenya, Tanzania, and Uganda laws and regulations that impede cross-border investment along with the regional mean for sub-Saharan Africa. and trade. Produced by the World Bank’s Doing Business Survey, the Article 24 of the EAC Common Market Protocol spe- index measures access to credit information available cifically requires EAC members to eliminate restrictions through public credit registries or private credit bureaus. on the free movement of capital. Annex VI of the proto- The cross-national pat­ tern mirrors what was found in Fig- col identifies twenty operations involving securities, credit, ure 36, that is, while both Kenya and Uganda have made direct investment, and personal capital transactions that some progress in expanding the coverage of credit infor- should be free from any legal restrictions. However, with mation by licensing private credit bureaus to facilitate the 51 East African Common Market Scorecard 2014: Tracking EAC Com­ 50 M. D. Chinn and H. Ito, “A New Measure of Financial Open- pliance in the Movement of Capital, Services and Goods. Washington, ness,” Journal of Comparative Policy Analysis, Vol. 10, No. 3, pp. 309– DC: World Bank, 2014. https://www.wbginvestmentclimate.org/ 322, 2008. publications/eac-market-scorecard-2014.cfm FIGURE 37: Depth of Credit Information in EAC Countries 6 5 4 3 2 1 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 SSA Kenya Tanzania Uganda Note: The depth of credit information index ranges from 0 to 6 with higher values indicating greater availability of credit information. Source: World Bank Doing Business Survey. 76 Political economy of regional integration in sub-saharan africa reference to capital movement, the Scorecard researchers would provide the most tangible benefits for the largely find that only two capital operations are free from restric- unbanked populations of countries such as Burundi, tions in all five EAC countries: external borrowing by resi- Uganda, and Tanzania. dents and repatriation of proceeds from sale of assets. Otherwise, many other capital operations, including those concerning securities and direct investment, continue to 7. Conclusions be hampered by legal restrictions. Capital controls are This chapter has examined the evolving dynamics of the most severe restriction on the movement of capital regional financial integration in the EAC. The evidence across the EAC, affecting the majority of transactions cov- suggests that regional initiatives and government policies ered under the protocol. Indeed, while the EAC Common continue to lag behind the market forces that stimulated Market Protocol that went into force in 2010 prohibits new the cross-border investments of banks over the past two restrictions on capital movement, Rwanda, Tanzania, and decades. The inte­ gration process has also evolved asym- Uganda have since adopted at least ten new restrictions. metrically, as Kenyan banks have aggressively pursued All EAC countries maintain restrictions that affect opportunities in neighboring markets with little to no invest­ment from other EAC members, but the degree of cross-border participation from banks based other EAC restriction varies considerably across countries. Scorecard countries. This asymmetry stems to a large degree from researchers find that capital movement is easiest under widely differing conditions in terms of financial develop- Kenya’s legal framework: 17 of the 20 operations identi- ment. Kenya’s financial sector has long been the region’s fied in Annex VI of the Common Market Protocol are unre- largest and most developed, while the financial sectors in stricted. In Rwanda and Uganda, 15 of the 20 operations countries like Uganda and Tanzania continue to recover are unrestricted. Capital movement is most difficult in Tan- from the legacies of previous statist banking policies. zania and Burundi, where only 4 of the 20 operations are All EAC members have agreed to establish a monetary unrestricted. And they are the only two EAC countries that union within ten years, and they have already taken posi- restrict lending abroad by their residents. tive steps to coordinate financial policies and regulatory Scorecard researchers further find that EAC members activ­ities. The creation of a supervisory college framework have yet to attain the coordination required for monitoring that brings together central bank representatives from and enforcing the free movement of capital within the com­ all EAC members to examine banks that operate region- mon market. With the exception of Burundi, EAC members ally is one such example. Nevertheless, the principal chal- have put in place exemptions to the protocol for the pur­ lenge to greater regional financial integration in the EAC poses of prudential supervision and public policy. Yet, they remains the divergence between government policies and have failed to notify their partners or the EAC Secretariat official attitudes. Financial firms and services have yet to along with evidence that the exemptions were justified, as receive equal treatment across borders because some required by the Common Market Protocol. EAC members have yet to fully implement commitments This failure to fully liberalize capital markets and finan- made under prior protocols. Some governments may fail cial services, as stipulated in the EAC protocols, may help to carry out neces­ sary reforms, or even enact new barri- to explain why the potential benefits of greater bank- ers, because financial integration may threaten domestic ing competi­ tion (e.g., lower intermediation spreads and interests linked to those who hold office. But, as a result, broader banking access) have yet to be realized in most the benefits to be derived from greater regional financial EAC countries. The large banks that dominate banking integration—greater compe­ tition, lower costs, broader have been able to con­ tinue charging considerable mark- access—will not be fully realized. ups on financial services despite the entry of Kenyan and foreign banks in most EAC markets. Large banks can afford the costs associated with capitalizing subsidiaries in sepa- References rate markets and meeting the requirements of multiple African Development Bank. 2010. 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Introduction In this context, this chapter attempts to support these reform efforts by identifying the key policy constraints In East Africa, professional services are a small but grow- affecting professional services and analyzing the regula- ing sector that is important to industries including mining, tory experiences in accounting, engineering, and legal manu­ facturing, and other service sectors. They aid growth services in Eastern Africa. Section 2 summarizes the key through such benefits as higher productivity, lower trans- findings of previous studies on professional services. action costs, and better production processes. On the These studies revealed a large cross-country and sectoral basis of a survey of more than 500 firms, earlier studies variance of the regulatory and trade environment and a have found that East African firms that use professional significant diversity in the reform experience of the exam- services (auditing/accounting, legal, and engineering) are ined countries and sectors. An important lesson learned 10 to 45 percent more productive than firms that do not from the EAC regu­ latory experiences is that there is hardly use these services. Professional services are also an impor- ever a “quick fix solution” to regulatory problems. The tant avenue for both export diversification and increasing sometimes slow and modest results of regulatory coop- exports. However, at present professional services make eration reflect the complex political economy processes a “meager” contribution in East Africa. There are relatively that need to be addressed when implementing regulatory few professionals and the region is facing a “middle-level reforms. Sections 3 and 4 therefore extend the analysis skills vacuum”—for example regarding paralegals—and a on professional services to include conceptual and applied broad mismatch of skills and needs. questions regarding the political economy of reform with Policymakers in East African countries have recog- the objective of providing concrete guidance for reforms nized that weaknesses in their professional services sec- and accelerating regional integration in East Africa. Section tors impede growth and are beginning to prioritize reform 5 concludes. of these services, including by creating more integrated regional markets. In parallel with domestic reforms in these sectors, the five countries of the East African Com- 2. Professional Services munity (Burundi, Kenya, Rwanda, Tanzania, and Uganda) in East Africa are beginning to implement commitments on professional services included in the Common Market Protocol. Also, the The analysis of professional services sectors in Africa has development of mutual recognition agreements (MRAs) of been hampered by the lack of information on demand and professional qualifications to facilitate the movement of pro- supply, including data on market conditions and policies fessionals supplying services in sub-Saharan Africa features and regulations in professional services. To address this high on the agenda of the EAC. In fact, the EAC countries gap, a comprehensive data collection exercise including have already signed agreements on the mutual recognition enterprise surveys covering users and providers of pro- of professional qualifications and licensing requirements in fessional ser­vices, and regulatory surveys (covering entry accounting, engineering, and architectural services.1 and conduct regulation applied to domestic and foreign providers), was undertaken by the World Bank in Eastern Nora Dihel, Trade and Competitiveness Global Practice, Africa in 2009–10. The World Bank analysis highlighted the World Bank and Michael Jelenic, Governance Global Practice, economic impor­ tance of professional services, the nature World Bank of restrictions that currently segment the regional market 1 The MRA for accounting services was signed in September and prevent trade in professional services between sub- 2011, the MRA on architectural services in July 2011, while the Saharan African countries, and the regulatory issues that MRA in engineering services in December 2012. must be addressed to allow for effective competition in 80 Political economy of regional integration in sub-saharan africa an integrated regional market (World Bank 2010a, 2010b, acquire the job-market relevant skills and the crucial 2011a, and 2011b). Key findings included: practical training. ■■ The professional services sector is among the most dynamic in the region and, crucially, higher labor pro­ Regulatory reforms need to focus on incremental, quali- ductivity is associated with greater use of professional tative improvements in domestic regulation: services in Eastern African firms. ■■ Disproportionate cumulative entry requirements need ■■ There are striking differences in the level of development to be relaxed. For example, narrowing the scope of of professional services across countries in Eastern exclusive tasks in certain professions would contribute Africa suggesting that the potential for regional trade in to this goal. Exclusive rights can lead to increased professional services is significant. specialization of professionals and guarantee a higher quality of service, but if they create monopolies they ■■ Regional integration could help address the underde­ can have adverse price and allocation effects, especially velopment of professional services markets, reduce when granted for services for which adequate quality the high costs of accessing professional services, and can be provided at a lower cost by less-regulated alleviate skills shortages and skills mismatches in pro­ middle-level professionals. Adequate regulations to fessional services. ensure that professionals are equipped with market- ■■ At this stage, restrictive trade policies and regulatory relevant skills need to be put in place. heterogeneity have segmented regional markets for ■■ Disproportionate price restrictions that limit competition professional services in sub-Saharan Africa and have need to be eliminated. Price regulations affecting increased trade costs. legal services and public procurement contracts ■■ To turn this sector around, the studies call for in engineering are supported and introduced by policy action in four areas: education, regulation of professional associations or the government, who professional services, trade policy, and labor mobility claim that they are useful tools to prevent adverse at both the national and international levels. selection problems. The EAC countries need to adopt less restrictive mechanisms, such as better access In particular, the studies called for the following policy to information on services and services providers to reforms: accomplish the same goals at lower economic cost. ■■ The countries need to allow advertising of professional Reforms at the National Level services, which facilitates competition by informing con­ Education reforms need to help students acquire market- sumers about different products and which can be used relevant skills: as a competitive tool for new firms entering the market. ■■ Financial constraints prevent individuals from acquiring ■■ The key issue regarding regulatory reform is not less a professional education, so developing new and regulation but better regulation; that is regulation that expanded means of financing higher education (such as more effectively achieves public policy objectives while student loans schemes) is a priority. ensuring efficiently produced low cost services. Tools and procedures can be put in place to assist policy ■■ Weaknesses in African educational systems mean that makers to assess whether existing or new regulation students are poorly equipped to acquire professional will achieve the sector-specific public policy objectives skills, so enhancing the quality and capacity of schools while contributing to market openness. (especially in mathematics, sciences, and technical studies) needs to be a key item on all countries’ policy agendas. Reforms at the International Level ■■ Given the capacity constraints and quality limitations of The fragmentation of regional markets for professional professional education institutions, improving existing services and professional education by restrictive policies institutions and encouraging the creation of new ones is and regulatory heterogeneity prevents countries from tak­ necessary. ing advantage of gains from trade based on comparative ■■ Policy action to encourage closer collaboration and con­ advantage, as well as gains from enhanced competition and sultation between employers, professional associations, economies of scale. Trade barriers would ideally be liber­ and education institutions could help professionals alized on a most favored nation (MFN) or non-preferential Chapter 4: Political Economy of Trade in Professional Services in the EAC 81 basis, since this would generate the largest welfare gains, regional integration, through regulatory cooperation with and complemented with regional cooperation to reduce neighboring partners who have similar regulatory prefer- regulatory differences. ences, can usefully complement non-preferential trade liberalization. Opening up regional boundaries and estab- In education, the EAC countries should consider options lishing Mutual Recogni­ tion Agreements (MRAs) would to develop regional training hubs. facilitate EAC integration in professional services. The EAC The absence of institutions that offer specialized (post- Common Market Protocol, adopted by the Multi Sector grad­ uate) courses (e.g., in legal and engineering services) Council in 2009, includes an annex on a framework agree- was noted in several EAC countries, as was the absence ment on MRA of academic and professional qualifications. of insti­tutions offering academic and professional training The five EAC countries have already signed an MRA in courses for middle-level professionals. Where the market accounting services and imple­ mentation focuses on the of a given country (e.g., Burundi or Rwanda) is too small to following areas: requirements for education, examina- justify the creation of these missing institutions or courses, tions, experience, conduct and ethics, professional devel- policies to facilitate access to foreign training are needed— opment and re-certification, scope of practice, and local including portability of course credits and scholarships. knowledge. However, implementation of the negotiated Also, specialized courses for which a need was expressed MRAs remains a challenge across the region. in several EAC countries (e.g., legal courses focusing on Policy measures in all four areas—education, domestic e-commerce, technology transfer, etc.) could be designed regulation, trade, and labor mobility—can affect the markets and implemented at the regional level. In general, the for professionals and professional services, including the fragmen­ tation of the regional market for education by differ- exports of professional services to regional trading partners. ences in regulation can prevent the emergence of regional hubs for higher education, so smoothing these regulatory differences can lead to a greater variety of higher education 3. The Political Economy of services becoming available at lower costs for students in Trade in Services: A Theoretical sub-Saharan Africa. Regional institutions that are allowed to operate at the regional level and are accredited to deliver Approach courses that are recognized by all countries could exploit While a subset of the EAC group has made good progress economies of scale and recoup the large fixed costs of with regional liberalization and regulatory cooperation, establishing training programs in order to produce students such developments have been much slower in the other with the necessary specializations for the EAC region. member countries where a handful of regulatory restric- tions and trade barriers still persist in professional ser- In terms of trade reforms, steps need to be taken to relax vices. This sort of disparity persists across sectors too. At the explicit trade barriers applied by EAC countries to the the one end of the regulatory reform spectrum, we find movement of natural persons and commercial presence vices regulation has barely moved over the that in legal ser­ of professional services. past ten years. At the other end extensive regulatory and Examples of possible reforms are: trade reforms have been implemented in accountancy and ■■ Articulating the economic and social motivation for engineering services. Most progress seems to be achieved nationality and residency requirements; in accountancy services where domestic reform has been complemented with regulatory cooperation at the regional ■■ Minimizing restrictions on the forms of establishment level. According to stakeholders in several East African allowed; countries, one factor that explains the more rapid prog- ■■ Developing a transparent and consistent framework ress with both regulatory and trade reforms in accounting for accepting professionals with foreign qualifications. services is the increased exposure to foreign competitors. To better understand the uneven progress with reform The reduction of explicit trade barriers also needs to be at the national level and help accelerate regional integra- com­plemented with the reform of immigration laws and tion in professional services in the EAC region this section rules on the hiring of foreign workers. will address in detail the political economy constraints asso- Trade liberalization needs to be coordinated with regula- ciated with professional services reform. The framework tory reform and cooperation at the regional level. Deeper of our analysis is rooted in the recent political economy 82 Political economy of regional integration in sub-saharan africa literature of trade and regulatory reform. It applies a “prob- sectoral, strategic, and international drivers covered by the lem-driven” political economy approach to better under- “problem-driven” political economy approach with insights stand the potential roadblocks and frictions to reform and into the political framework to develop practical advice and explain why progress in implementing these recommen- guidance to policy makers who wish to implement reform. dations has been slow and uneven across countries and We will attempt to answer the following questions: What sectors (See Box 2). triggered regulatory changes in reforming countries? Why There a number of political economy approaches that were some sectors reformed earlier and more deeply than could be used to analyze trade liberalization. For example, others? What explains the more rapid progress in certain Gilpin (2001) analyzes the comparative drivers of economic EAC countries? How can we explain the different degrees integration, while Mansfield, Milner, and Pevehouse (2008) of resistance to change by country or sector? How can we look at the political factors and relationships among coun- advance the EAC integration process in professional ser- tries to explain trade agreements results. Whenever pos- vices? How can we build on progress in the more advanced sible, we will try to com­ plement the structural, institutional, subset of countries? BOX 2: Problem-Driven Political Economy While there are numerous political economy meth­ A three-level, problem-driven approach as described odologies available, a particularly useful framework is above can be especially useful in understanding the offered by using a “problem-driven” governance and underlying political economy determinants and con­ political economy (PGPE) approach, developed by the straints to the professional services sector. Given the World Bank (Fritz, Kaiser, and Levy 2009). At the core nature of the sector, the trajectory of its development in of such an approach is a focus on a particular prob- the EAC region thus far, and the potential transforma- lem, opportunity, or vulnerability that needs to be tive effects it can have on both the regional and national addressed. Such a methodology allows for a better economies of the member states, it is essential to tease understanding of specific issues and challenges, rather out the key drivers that contribute to the development, than on developing broad overviews, in order to gener- regulation, and future prospects of trade in services. ate useful findings and implications (ibid.). Accordingly, this analysis is not about identifying one Once these individual issue areas are delineated, major bottleneck, but rather, understanding the politi- a second level of analysis will involve mapping out the cal economy decisions of a myriad of challenges and governance and institutional arrangements as well as tions, and perhaps suggesting which dimensions fric­ their weaknesses. This involves a thorough mapping of could be addressed. Such an approach will provide the relevant branches of government, ministries, SOEs insight not only into challenges that result in neces- and their interaction; existing laws and regulations; and sary reforms not gaining traction, but also into poten- de jure and de facto policy processes. The reasoning for tial opportunities that may unlock key roadblocks in the mapping out these arrangements is to understand how reform process. they might relate to poor outcomes or the lack of prog- As will be detailed below, the three domestic driv- ress on certain reforms. Once this analysis of the insti- ers will be further explained, and subsequently supple- tutional structure is complete, a third level of analysis mented by incorporating an additional three regional is applied to drill down to the political economy driv- drivers which can be extrapolated from the existing ers to identify key obstacles and opportunities. Accord- political economy literature on regional integration and ingly, this third level of analysis will seek to understand regional services agreements. In doing so, this analy- key stakeholders, rents and their distribution, historical sis hopes to present a customized framework through legacies, prior experience with reforms, social trends which trade in professional services can be conceptual- and forces, in order to draw inference and gain insight ized at the regional level, and to highlight specific issues into how these factors shape stakeholder actions and that are relevant for developing the services sector in interests (ibid). the EAC in particular. Chapter 4: Political Economy of Trade in Professional Services in the EAC 83 3.1 Domestic Level Political Economy Drivers historical roots, as opposed to their Anglophone neigh- bors in the East (Byiers, Vanheukelom, and de Roquefeuil The application of the PGPE approach will first consider 2013, 13–14). three domestic political economy “drivers” through a Institutional Drivers, which can be seen as the “rules detailed analysis of structural, institutional, and stake- of the game,” are a combination of the formal laws and holder issues. regulations, as well as less formalized customs and institu­ Structural Drivers are those factors that are beyond tions. Understanding both formal and informal institutions the control of the government and reflect deeper features is essential, as they provide a clearer picture about the of the respective countries, such as resource endowments, context in which actors operate, but also identify “levers geographic position, levels of development, or popula­ tion of change” in existing systems (Fritz, Kaiser, and Levy dynamics, which may affect a country’s institutional set-up. 2009, 46). From an institutional level, mapping can be a Such issues may additionally stem from the types of colo- valuable instrument in understanding structural political nialisation and decolonialisation that a particular country economy factors. As will be discussed subsequently, such experienced, as well as other historical processes that an exercise includes analysis of informal institutions such have shaped the political, social, and cultural institutions as kinship structures, traditions and social norms, as well that affect actors’ incentives (Fritz, Kaiser, and Levy 2009, as formally codified institutions such as laws, regulations, 10). In many cases these issues cannot be changed in the and agencies. Importantly, as noted by the problem-driven short- to medium-run, and define a country’s status quo literature, it is necessary to understand the relationship situation. At the same time, structural issues can have a between formal and informal institutions and to ascertain large impact on the opportunities that a country has with if they have complementary, accommodating, substituting, respect to its bargaining position, as well as with respect or competing relationships. to the exogenous risk that it faces in a global system. For Across EAC countries, however, there is a divergent example, structural issues may make an economy more degree of performance in terms of business climate, with exposed to commodity price shocks, currency fluctuations, Rwanda ranked as a top reformer (number 52) versus or other macro-economic fragilities. Burundi’s performance (number 159). The most notable Given the nature of the professional services sector feature of the region as a whole is the Common Market in the EAC, structural drivers could potentially have great Protocol, which entered into force in 2010 and guarantees importance on the political economy at the national lev- the free movement of people, goods, services, and capi- els across the five member countries. As noted by Byiers, tal. Despite this agreement to implement these policies Vanheukelom, and de Roquefeuil (2013) in their analysis by 2015 (Rwanda remains the only country to have met of the political economy of regional integration, there are the agreed deadlines), lack of implementation can have a a number of divergent structural issues in the EAC coun- great impact in how services are traded across the region tries which are particularly relevant. Kenya stands out as (Byiers, Vanheukelom, and de Roquefeuil 2013, 15). As the regional hegemon, with a total of 37 percent of EAC noted by the regional integration literature, informal cross- GDP and the highest per-capita GDP in the region. Tan- border trade is prevalent in the region, which can result in zania is the most populous country in the region with 48 the evasion of import and export barriers, and undermine million inhabitants, and, together with Kenya’s 43 million regional integration more generally (Brenton et al. 2014). inhabitants, accounts for 70 percent of the EAC economy. Actor/Stakeholder Drivers involves analyzing the Uganda, Rwanda, and Burundi have a smaller economic divergent interests of government agencies, political par­ footprint in terms of the EAC’s overall economy, and their ties, NGOs, business associations, traditional associations, landlocked nature separates them from Kenya and Tan- and producers and traders of certain products, as well zania, who have direct coastal access through their large as external actors such as donors, foreign investors, and ports. Kenyan exports to the EAC represent approximately international organizations. From a stakeholder level, map­ a quarter of its total exports, while export concentration to ping can provide vital information on the various types of EAC markets by Tanzania is considerably smaller. Exports parties involved—whether they are individuals or specific in EAC countries, regardless of their size, are generally groups such as government officials of a particular ministry, concentrated in primary commodities. Aside from these agency, CSO, business association or political party. Once economic, population-based, and geospatial differences, key stakeholders are identified, the problem-driven litera- the five countries of the EAC have divergent colonial his- ture suggests that they can be categorized in a number of tories, with Rwanda and Burundi having Francophone 84 Political economy of regional integration in sub-saharan africa ways to be able to understand their interests in terms of Accounting for regional integration, political econ- demand side versus supply side actors, reform champions omy dynamics relies on many of the same “drivers” as versus reform opponents, or winners versus losers from presented in the problem-driven approach above. How- certain reforms. Taken together, the OECD suggests that ever, to provide a better understanding of the political such “games within the rules,” are concerned with the bar- economy drivers of trade in services, the problem-driven gaining among social groups and the state over the use, political economy framework presented above will be production, and distribution of resources (VanGrasstek supplemented based on the regional integration political 2011). Moreover, while the OECD views these as issues economy analysis developed by Byiers, Vanheukelom, and related to political processes, these issues can also be de Roquefeuil (2013), the OECD’s International Drivers viewed as those between elite strategies and state-society of Corruption (2012), and the OECD’s political economy bargaining. work on services trade in Regional Trade Agreements Analyzing trade in professional services in the EAC from (VanGrasstek 2011). This analysis will thus adopt three a stakeholder/actor level is an important, yet espe­ cially additional drivers—sectoral, global/international, and complex, exercise. Given that the EAC comprises five coun- strategic—to derive a customized and flexible framework tries, and professional services relate to three discrete through which to view the political economy of trade in sectors—accounting/auditing, engineering/­ architecture, services in the EAC. and legal services—a total of fifteen stakeholder matrices Sectoral Drivers: A sectoral approach is necessary for can emerge. However, since this would merely result in a several reasons. First, different sectors have differing levels broad overview of stakeholders, some of which are irrel- of political salience and visibility at the national level, and evant to the particular problems faced by the services sec- accordingly, will incentivize politicians or service provid- tor, the subsequent analysis will approach these issues by ers in different ways. Second, depending on information focusing on four key areas for reform—education, regula- asymme­ tries, more visible policies make it easier to attri- tions at the domestic level, trade barriers and liberalization bute credit or blame. Third, the balance of power between efforts at the international level. Accordingly, the relevant policy makers and other actors is important, as monopoly stakeholder analysis will be based on information obtained services can reduce state incentives for oversight and from the World Bank’s Knowledge Platform on Profes- improved perfor­ mance. Last, sector services that are fre- sional Services in Eastern and Southern Africa as well as quent, predictable, or area-based may make it easier for service provider/user surveys, and will only be applied to citizens or other groups to mobilize collectively (Byiers, key “problems” in each of these reform areas, which will be Vanheukelom, and de Roquefeuil 2013, 12). defined subsequently. While not all of these issues are salient to the politi- cal economy of trade in professional services in the EAC, it is nonetheless important to analyze sectors on an 3.2 Regional Political Economy Drivers individual basis. In the context of professional services, Since trade in services will be analyzed in a regional the three main sectors—accounting/audit, engineering/ c ­ ontext—that of the East African Community—it is essen- architecture, and legal—will be analyzed separately to bet- tial to draw on previous political economy work done on ter understand why some sectors have been more suc- regional integration. A regional integration perspective cessful in implementing reforms and why others have failed provides an important lens for analyzing political economy or are unable to do so. While sectors may share many of issues as regional processes can create additional com- the same institutional actors (i.e., ministries of labor, trade, plexities and can be viewed as a “two level game” of regional commerce, etc.) or be subject to the same formal/informal diplomacy and domestic politics (Putnam 1988). More- gration laws, propensity for informal institutions (i.e., immi­ over, as noted by Byiers, Vanheukelom, and de Roquefeuil cross border trade, etc.), individual stakeholders may differ (2013, 6), “The regional protocols and treaties represent widely across the three sectors. The differences between rules-based, formal agreements reflecting interstate inter- actors are particularly salient with respect to their relative ests and balances of power. Yet the implementation takes bargaining power, the ability to “capture” the policy pro- place at the national level, mediated through domestic cess, and their ability to grant—or withhold—professional political power relations and games, which reflect—among certifications. Accordingly, understanding how these actors other things—the system and types of distribution of eco- function may highlight key sticking points as well as provide nomic rents and on the other factors.” information on points of entry to unlocking reforms. Chapter 4: Political Economy of Trade in Professional Services in the EAC 85 In addition to these considerations, at a sectoral level, (2) international legal measures and sanctions, which can modes of trade can have a large impact with respect to the impact trade, financial, and travel restrictions; (3)  reputa- particular political economy problems that emerge and tional pressures on stakeholders, which can relate to the the types of reforms that are pursued.2 Moreover, addi- influence that international organizations, RECs, or inter- tional sectoral issues may emerge as “countries’ willing- national business group have on trade in professional ness to make commitments in services are often inhibited services; and (4) external skills and ideas, which relate to by the horizontal fragmentation of power either between international practices and ideologies on doing business. branches of government (executive vs. legislative) or within Strategic Drivers are referenced by the literature on them (trade ministries versus other ministries or agencies), the political economy of services in regional trade agree­ and in some countries the problem is further exacerbated ments (RTAs), which notes that “the political dynamics of by the vertical fragmentation of power (national govern- RTAs and their service provisions can be seen at two lev- ments versus subnational units of government) (Van- els, which we may identify as economic statecraft (inter- Grasstek 2011, 6). national political economy) and the domestic politics of Global Drivers: Certain global dynamics or processes trade (national political economy)” (VanGrasstek 2011, 10). may shape domestic institutional and political incen- “Grand Strategic” considerations can be conceptualized as tives, which may have either positive or negative impacts those that “speak to a country’s aspirations in the trading on domestic institutions and governance arrangements system as a whole, or even the broader system of inter- (Byiers, Vanheukelom, and de Roquefeuil 2013, 12). The national relations in which trade is just one component, OECD approaches these drivers based on the effect that and are especially significant when examining the agree- they have on corruption and governance at the state level. ments reached by the largest and most influential par- These could include: (1) sources of rents and unearned ticipants in that system” (Ibid, 12). While only the largest incomes; (2) opportunities and constraints to conceal and and most powerful countries in a trading system may have move illicit assets; (3) foreign investment; (4) global and grand-strategic motivations, countries of all sizes can have regional security threats and responses; (5) international “Strategic Political” interests, irrespective of size and levels legal measures and sanctions against domestic elites; of development, which “take into account when deciding (6)  reputation pressures on political elites from regional whether to negotiate RTAs in the first place, with whom, and international actors; and (7) external ideas and skills and on what terms” (Ibid, 12). As noted by the literature, (OECD 2012). Importantly, these issues should not only these considerations can be economic, political, or a com- take into account current exigencies, but their potential to bination of the two, and may have a binding effect on why a affect governance in the future. country may decide to negotiate services into a RTA as well Clearly, several global/international drivers can have as the terms that it pursues in the agreement. a particular impact on the domestic political economy of In the case of trade in services in the EAC, it is difficult trade in services, including: (1) foreign investment, which can to say whether certain countries are factoring in grand stra­ provide evidence on the intentions and interests of exter­ tegic objectives. As noted earlier, Kenya (and Tanzania to a nal investors and firms—especially those facing external lesser extent) can be seen as the regional hegemon in the competition—which affect how they lobby governments; EAC, and may take a leading role in deciding which services sectors to liberalize. In addition, as highlighted by the OECD, by examining strategic interests, it can be easier to parse 2 The definition of services trade under the GATS is four- out the idea of openness between pro-trade institutions pronged, depending on the territorial presence of the supplier (executive branch, foreign ministries, etc.) and other more and the consumer at the time of the transaction. Pursuant to skeptical groups (legislatures and client-oriented ministries). Article I:2, the GATS covered services can take four modes: (1) Cross border trade (i.e., from the territory of one Member into the territory of any other Member); (2) Consumption abroad (i.e., in the territory of one Member to the service consumer of any other 4. Applied Political Economy Member); (3) Commercial presence (i.e., by a service supplier of one Member, through commercial presence, in the territory of Analysis: A Sectoral Perspective any other Member); or (4) Presence of natural persons (i.e., by a service supplier of one Member, through the presence of natural As mentioned in the theoretical political economy approach persons of a Member in the territory of any other Member). See presented above, significant analysis can be done at the http://www.wto.org/english/tratop_e/serv_e/gsintr_e.pdf. country, sectoral, and project levels. At the country level, the 86 Political economy of regional integration in sub-saharan africa TABLE 7: Integrated Political Economy Framework for Regional Services Trade Political Economy Driver Description/Example Applied to Trade in Services in EAC Structural Drivers: • Economic base/level of development • Kenya produces 43% of EAC GDP Factors beyond the control of the • Climate/geography • Kenya and Tanzania are the most state which reflect deeper economic, • Population/social dynamics populous EAC countries political, social, and geo-spatial issues • Interaction with global economy (trade/ • Uganda, Burundi, and Rwanda are migration) landlocked • Poverty/inequality • New natural gas reserves discovered in • Natural resource endowments Tanzania • Regional security context • Differing colonial history Institutional Drivers: • Formal: Constitutional set-up, electoral • Highly institutionalized regional “Rules of the game,” based on formal rules, and codified laws organizations in the EAC laws and regulations, as well as less • Informal: Social norms, expectations, • Business climate differs greatly across formalized customs, institutions, and patronage networks, informal countries relationships governing the behavior arrangements, kinship structures, and • Informal cross-border trade is of actors, and their interaction traditions prevalent in the region • Differing systems of government across countries Stakeholder/Actor/Political Process • Political elites (president, prime minister, • Institutional level: Core Public Drivers: ministers) Agencies relating to trade, Compliance “Games within the rules” based on • State bureaucrats (mid-level technocrats institutions, Immigration laws/ bargaining between social groups, employed by relevant ministries) authorities, etc. political elites, state bureaucrats, and • Sector actors, producers, and consumers • Actor level: Professional Service sector actors • Civil society (political parties, interest providers, professional associations, groups, business associations, trade business promotion associations, etc. unions, etc.) • External stakeholders (other governments, international organizations, development partners, international NGOs) Sectoral Drivers: • Some sectors have greater visibility • Legal series are more heavily regulated Technical features of a particular than others and political elites are more and have restrictive explicit trade sector that influence governance accountable for reforms. barriers and accountability, and result in • Some sectors are prioritized more than • Accounting and Engineering are more differences in the way that actors others in terms of the government’s liberalized via Mutual Recognition approach reforms. political agenda. Agreements • Some sectors are easier to reform than others. International Drivers: • Sources of rents and unearned incomes • EAC countries compete for foreign Global or regional factors that • Potential to move illicit assets investment influence the domestic political • Foreign investment • International organizations and donors economy of a particular country. • Security threats have a strong voice in aid-dependent • International legal remedies and sanctions countries • Reputational pressures • Significant decision making power at • External ideas and skills the EAC level Strategic Drivers: • Grand Strategic: countries’ aspirations in • Kenya has positioned itself as regional Strategic considerations designed not the trading system as a whole hegemon in the EAC only to achieve commercial objectives • Strategic Political: domestic bargaining • Tanzania is significantly less EAC- but also to promote other objects of which impacts the choice of policies motivated and oriented political and economic statecraft. • Other EAC countries have divergent strategic interests Note: This political economy framework for conceptualizing trade in services is based on governance, regional integration, trade, and political economy literature, which have referenced structural, institutional, stakeholder, sectorial, international, and strategic drivers, including: • Problem-Driven Governance and Political Economy Analysis (Fritz, Kaiser, and Levy 2009) • Arguing a Political Economy Approach to Regional Integration (Byiers, Vanheukelom, and de Roquefeuil 2013) • International Drivers of Corruption: A Tool for Analysis (OECD 2012) • The Political Economy of Services in Regional Trade Agreements (VanGrasstek 2011) Chapter 4: Political Economy of Trade in Professional Services in the EAC 87 main purpose of understanding political economy issues is institutions and stakeholders are mapped out it is easier to comprehend “politics in action,” in terms of cross-cutting to understand the political economy dynamics of a par- drivers, such as key functional dynamics, historical factors, ticular system. As noted by Fritz, Kaiser, and Levy (2009), key institutional structures, main actors and stakeholders, “the two are linked as actors shape institutions (especially as well as other issues such as patronage networks and where formal institutions are weak/volatile) and, vice versa, rents. However, as noted by the problem-driven approach, institutions influence the incentives and constraints that self-standing country-level analysis has limits, and in the stakeholders face” (45). case of the forthcoming analysis, a thematic—and sector- In line with the framework developed in the previous level approach is adopted as it provides the best level of section, this sub-section hopes to address two of the analysis to examine challenges and vulnerabilities, gover- larger political economy drivers facing the service sector nance and institutional arrangements, and the most rel- in the EAC. First, this analysis will attempt to unpack the evant political economy drivers of trade in services. policy elements that matter across the three professional sec­tors—accounting/auditing, engineering, and legal services. In doing so, analysis will map out each sector—­ 4.1 Institutional and Stakeholder Mapping illuminating the processes necessary for a professional at the Sectoral Level or firm to render their service to market in a domestic Sectoral mappings can be a helpful tool in disaggregating or foreign context. Second, this analysis will examine the a sector and defining what aspects are most important key institutional and stakeholder level incentives in each to analyze (Fritz, Kaiser, and Levy 2009, 64). Understand- sector, based on a similar problem-driven methodology. ing the political econ­omy of trade in services will require These two levels of analysis will rely on templates pro- such a thematic level of analysis as there are a number vided by the business processes in each sector, and an of shared issues in the regulation of various professional institutional and actor-level framework. Drawing on past services sectors (see Annex 1 for the key conceptual issues literature, especially World Bank (2010), the analysis drills affecting regulation of professional services). However, not down further to better understand the key institutions and all sectors—within the “theme” of trade in professional individual stakeholders involved in the process, as well as services—operate in the same manner, which makes it the relationships, interests, and incentives of these parties essential to develop individ­ ual sectoral mappings to bet- with respect to expanding or constraining the trade in pro- ter understand key issues and levers of change. Once key fessional services in the EAC. 4.2 Accounting and Auditing—Institutional and Stakeholder Mapping Steps to Obtain Academic and Professional Qualifications National Membership University Practical CPA Domestic Continuing Qualification in Professional Degree training Certification Licensing Education Exam Association As noted by previous studies and regulator surveys, there (CPA). In order to practice as a CPA, it is required that indi- are a number of steps to acquire the academic and pro- viduals become members of their national professional fessional qualifications necessary to work as an accoun- associations, who in turn issue the licenses necessary to tant/auditor in the EAC. First it is necessary to obtain the practice domestically. In some countries (Kenya, Tanzania, appropriate level of education, which is either a university and Uganda), professional asso­ ciations require continu- degree (Rwanda and Tanzania) or a secondary school cer- ing education to maintain licenses to practice. Underlying tificate (Kenya and Uganda). After the necessary degree this entire process are standards relating to the educa- is obtained, some countries require a period of practical tion, qualification, and licensing of professionals as well training (Kenya and Tanzania). All countries in the EAC as technical standards (finance and reporting standards). require that accountants then pass a national qualifica- The scope of accounting activities is similar across all EAC tion exam in order to obtain a public accountant certificate countries. 88 Political economy of regional integration in sub-saharan africa Steps to Provide Services in the Domestic Market Entry Regulation Competition Law Price Regulation Advertising Restrictions Business Structure Once the necessary academic and professional qualifi- services, advertising of such services is prohibited in Kenya, cations are obtained, domestic providers (professionals Tanzania, and Uganda. In addition, some countries (Kenya, and firms) are subject to conduct regulations in delivering Tanzania, and Uganda) restrict the type of legal entities accounting and auditing services. In Kenya, Rwanda, and through which accounting professionals can exercise their Tanzania pro­viders must abide by competition laws. While profession, and others (Tanzania and Uganda) limit the type none of the EAC countries regulate the pricing of accounting of cooperation allowed with other professionals. Steps to Provide Services in Foreign Markets Recognition of Experience Foreign Licensing Scope of Activity Conduct Regulations Qualifications in Host Country Restrictions Restrictions Should accounting/audition professionals and firms want to Rwanda, and Uganda), establishment of branches of foreign render their services in foreign markets, there are number accounting firms are prohibited, and Kenya and Tanzania of additional restrictions and regulations which must be met. restrict foreign owner­ ship by non-locally licensed profes- While EAC countries do not impose residency or national- sionals and firms. In other countries (Tanzania and Uganda), ity requirements on professionals, a number of countries there are restrictions on the scope of cross border and pro- (Kenya, Tanzania, and Uganda) impose quantitative restric- curement activities that foreign accounting firms can engage tions based on labor market or economic needs tests. in. Finally, in order to render their services in a foreign coun- Academic and professional qualifications are recognized try, accounting firms must meet the conduct regulations of qualifications obtained in EAC and IFAC member countries; the foreign market, as described above. however, Kenya and Uganda do not automatically recognize Table 8 summarizes the key institutions and stake- licenses obtained in other jurisdictions and require host holders involved in reforms related to education, domes- country experience before domestic licenses are granted. tic regulation, trade, and labor mobility in accounting and (MRAs may change this situation.) In some countries (Kenya, auditing services. 4.3 Legal Services—Institutional and Stakeholder Mapping Steps to Obtain Academic and Professional Qualifications Membership University Practical Domestic Continuing Bar Exam Bar Certification in Professional Degree Training Licensing Education Association To become a lawyer in the EAC, it necessary to obtain a qualifications for paralegals are more relaxed than those uni­versity degree in law and undertake one additional year for lawyers, as they do not require a university degree, of practical training in a firm. Some countries (Kenya, Tan- licenses, or membership in national bar associations. Simi- zania, and Uganda) even require post-graduate legal train- lar to accounting/auditing, legal professionals are bound ing. Once these educational requirements are met, legal by mandatory standards for education, qualification, professionals must pass a national bar exam and become licensing, and maintaining technical standards and profes- members of their national bar associations, which regulate sional conduct in Kenya and Tanzania, but not in Uganda access to the profession by compulsory licenses to prac- and Rwanda. Likewise, there is a specific range of activities tice. In Kenya and Uganda, it is necessary to obtain con- that legal professionals can exclusively engage in, and no tinuing education to practice. Academic and professional quantitative restrictions exist. Chapter 4: Political Economy of Trade in Professional Services in the EAC 89 TABLE 8: Accounting/Auditing Services Burundi Kenya Rwanda Tanzania Uganda Trade and • Ministries of • Ministries of • Ministries of • Ministries of • Ministries of Commerce Trade, Labor, Trade, Labor, Trade, Labor, Trade, Labor, Trade, Labor, Institutions Commerce, Commerce, Commerce, Commerce, Commerce, Interior, Foreign Interior, Foreign Interior, Foreign Interior, Foreign Interior, Foreign Affairs, Finance, Affairs, Finance, Affairs, Finance, Affairs, Finance, Affairs, Finance, etc. etc. etc. etc. etc. Immigration • Kenyan • Rwanda • Tanzania • Uganda Institutions and Constitution Ministerial Orders Immigration Acts Immigration Legislation • Government • Government of 1995 and 1997 Board and Bureaucracies Bureaucracies • Government Department Institutions Bureaucracies Higher • University of • Kenya • University Faculty • National Board of • Public Education and Burundi Faculty of Accountants and Ministry of Accountants and Accountants Certification Economics and Secretaries Education Auditors Examination Boards National Board Examinations Political and • EAC Institutions • EAC Institutions • EAC Institutions • EAC Institutions • EAC Institutions Regional • Common Market • Common Market • Common Market • Common Market • Common Market Institutions Protocol Protocol Protocol Protocol Protocol • Multi Sector • Multi Sector • Multi Sector • Multi Sector • Multi Sector Council Council Council Council Council • Mutual • Mutual • Mutual • Mutual • Mutual Recognition Recognition Recognition Recognition Recognition Agreements Agreements Agreements Agreements Agreements License • Society of • Institute of • Institute of • National Board of • Institute of Granting Professional Certified Public Certified Public Accountants and Certified Public Professional Accountants Accountants of Accountants of Auditors (NBAA) Accountants Associations (OCP) Kenya (ICPAK) Rwanda (ICPAR) (ICPAU) Private Sector • Big Four • Big Four • Big Four • Big Four • Big Four Operators Auditing & Auditing & Auditing & Auditing & Auditing & Accounting Firms Accounting Accounting Firms Accounting Firms Accounting Firms Firms—BDO • Grant Thornton International • Eastern Central • Eastern Central • Eastern Central • Eastern Central • Eastern Central Professional and Southern and Southern and Southern and Southern and Southern Associations African Federation African Federation African Federation African Federation African Federation of Accountants of Accountants of Accountants of Accountants of Accountants (ECSAFA) (ECSAFA) (ECSAFA) (ECSAFA) (ECSAFA) Actors and Stakeholders • International • International • International • International • International Federation of Federation of Federation of Federation of Federation of accountants accountants accountants accountants accountants (IFAC) (IFAC) (IFAC) (IFAC) (IFAC) • Association • Association • Association • Association • Association of Chartered of Chartered of Chartered of Chartered of Chartered Certified Certified Certified Certified Certified Accountants Accountants Accountants Accountants Accountants (ACCA) (ACCA) (ACCA) (ACCA) (ACCA) Business/Trade • East African • East African • East African • East African • East African Associations Business Council Business Council Business Council Business Council Business Council • Trade Mark East • Trade Mark East • Trade Mark East • Trade Mark East • Trade Mark East Africa Africa Africa Africa Africa • Kenya Export • Tanzania Promotion Investment Council Center Civil Society International • World Bank • World Bank • World Bank • World Bank • World Bank Organizations/ • EU • EU • EU • EU • EU Donors • AU • AU • AU • AU • AU • AfDB • AfDB • AfDB • AfDB • AfDB • Bilateral Donors • Bilateral Donors • Bilateral Donors • Bilateral Donors • Bilateral Donors 90 Political economy of regional integration in sub-saharan africa Steps to Provide Services in the Domestic Market Entry Regulation Competition Law Price Regulation Advertising Restrictions Business Structure Similar to the accounting/auditing profession, domestic individual professionals. Likewise, countries in the EAC have providers of legal services are bound by a number of con­ a number of business structure restrictions that govern the duct regulations. Although competition laws do not apply types of legal entities through which legal professionals can to legal professionals in Tanzania and Uganda, they are in practice, as well as restrictions on cooperation between place in Kenya and Rwanda. Conversely to the accounting/ legal professionals and other professions. While similar auditing profession, however, Kenya, Tanzania, and Uganda conduct restrictions are applied in a non-discriminatory have price regulations in place either through binding mini- manner to foreign providers as well, exceptions exist with mum or maximum pricing restrictions. In all countries, respect to price regulations (Uganda), structure (Kenya and the advertising of legal services is prohibited for firms and Uganda), and scope (Kenya and Uganda). Steps to Provide Services in Foreign Markets Recognition of Qualifications Foreign Licensing Restrictions Scope of Activity Restrictions Conduct Regulations Should legal professionals and firms want to render their eign firms are prohibited in Rwanda and Uganda. Finally, for­ services in foreign markets, there are number of further cross-border service provision is limited as individuals can restrictions and regulations which must be met. Unlike obtain advice from firms located abroad, but firms without accounting/auditing, Kenya and Tanzania place nationality a domestic presence cannot advise on matters regulated requirements on legal professionals, while Uganda places by domestic law. Likewise, procurement and selling of legal discretional limits on the presence of foreign profession­ services to government bodies is limited, and strict con- als. At the moment, all countries recognize professional duct regulations apply. qualifications from EAC member states; however, for- Table 9 summarizes the key institutions and stakehold- eign licenses are not immediately recognized. MRAs may ers involved in reforms related to education, domestic reg- change this situation. Establishment and entry of foreign ulation, trade, and labor mobility in legal services. firms is restricted in Kenya and Tanzania, and branches of 4.4 Engineering/Architecture—Institutional and Stakeholder Mapping Steps to Obtain Academic and Professional Qualifications National Membership Practical Domestic Continuing University Degree Qualification in Professional Training Licensing Education Exam Association In all countries in the EAC, a university degree is necessary Kenya and Tanzania require passing a national qualifica- to work as an engineering professional as well as between tion exam, and professional competence requirements are three (Kenya and Tanzania) to four (Uganda) years of prac- necessary in Uganda. With the exception of Uganda, while tical training under the supervision of a senior engineer. membership in professional associations is not required, Chapter 4: Political Economy of Trade in Professional Services in the EAC 91 TABLE 9: Legal Services Burundi Kenya Rwanda Tanzania Uganda Trade and • Ministries of • Ministries of • Ministries of • Ministries of • Ministries of Commerce Trade, Labor, Trade, Labor, Trade, Labor, Trade, Labor, Trade, Labor, Institutions Commerce, Commerce, Commerce, Commerce, Commerce, Interior, Foreign Interior, Foreign Interior, Foreign Interior, Foreign Interior, Foreign Affairs, Finance, Affairs, Finance, Affairs, Finance, Affairs, Finance, Affairs, Finance, etc. etc. etc. etc. etc. Immigration • Burundi— • Kenyan • Rwanda • Tanzania • Uganda Institutions Department of Constitution Ministerial Immigration Immigration and Legislation Immigration and • Government Orders Acts of 1995 and Board and Citizenship Bureaucracies • Government 1997 Department Institutions Bureaucracies • Government Bureaucracies Higher • University • University • University • University • University Education and Departments of Departments of Departments of Departments of Departments of Certification Law Law Law Law Law Boards Political and • EAC Institutions • EAC Institutions • EAC Institutions • EAC Institutions • EAC Institutions Regional • Common Market • Common Market • Common Market • Common Market • Common Market Institutions Protocol Protocol Protocol Protocol Protocol • Multi Sector • Multi Sector • Multi Sector • Multi Sector • Multi Sector Council Council Council Council Council • Mutual • Mutual • Mutual • Mutual • Mutual Recognition Recognition Recognition Recognition Recognition Agreements Agreements Agreements Agreements Agreements License • Ordre des • Law Society of • Kigali Bar • Tanganyika Law • Uganda Law Granting Advocats Kenya Association Society Society (ULS) Professional • High Court • Zanzibar Law • Law Council Associations Society Private Sector • No Market • Kaplan & • No Market • No Market • No Market Operators leading Firms Stratton Dally & leading Firms leading Firms leading Firms Figs • Hamilton Harris & Mathews Actors and Stakeholders • Anjarwalla & Khann International • Ordre des • Law Society of • Kigali Bar • Tanganyika Law • Uganda Law Professional Advocats Kenya Association Society Society (ULS) Associations • High Court • Zanzibar Law • Law Council Society Business/Trade • East African • East African • East African • East African • East African Associations Business Council Business Council Business Council Business Council Business Council • Trade Mark East • Trade Mark East • Trade Mark East • Trade Mark East • Trade Mark East Africa Africa Africa Africa Africa • Kenya Export • Tanzania Promotion Investment Council Center International • World Bank • World Bank • World Bank • World Bank • World Bank Organizations/ • EU • EU • EU • EU • EU Donors • AU • AU • AU • AU • AU • AfDB • AfDB • AfDB • AfDB • AfDB • Bilateral Donors • Bilateral Donors • Bilateral Donors • Bilateral Donors • Bilateral Donors 92 Political economy of regional integration in sub-saharan africa as in accounting and legal services, in some cases engineer- profession in most countries, the sector is largely unregu- ing professionals must be registered to sign engineering lated in Rwanda. Mandatory standards related to educa- contract documents. Despite this more relaxed require- tion, qualifications, and licensing, and technical standards ment to join professional associations, Kenya, Tanzania, exist in Kenya and Rwanda, and the scope of exclusive and Uganda regulate access to the engineering profession rights varies considerably among coun­ tries, although there through mandatory licenses by professional associations. are no quantitative restrictions in place. Continuing education is not required for the engineering Steps to Provide Services in the Domestic Market Entry Regulation Competition Law Price Regulation Advertising Restrictions Business Structure Similar to other professional services, domestic providers EAC country. As with other professional services sectors, of engineering services are bound by a number of entry advertising restrictions are applied to foreign firms in a and conduct regulations. Although competition laws do non-­discriminatory manner, with advertising only being not apply to engineering professionals in Tanzania and prohibited in Kenya. In terms of regulations of governance Uganda, they are in place in Kenya and Rwanda. Price business structures, non-dis­ crimination also applies; how- regulations are only applied in Tanzania with respect to ever, restrictions on business structure and permitted binding minimum prices, but do not exist in any other activities are generally more relaxed than in other sectors. Steps to Provide Services in Foreign Markets Recognition of Experience Foreign Licensing Scope of Activity Conduct Regulations Qualifications in Host Country Restrictions Restrictions Should engineering professionals and firms want to ren- EAC countries. Likewise, engineering is not bound by simi- der their services in foreign markets, there are a number lar restrictions of procurement by government entities; of further restrictions and regulations which must be met. however, Tanzania and Uganda do limit the scope of these All EAC countries recognize professional and educational activities based on firms having a national presence. qualifications obtained abroad and licenses are generally Table 10 summarizes the key institutions and stake­ recognized across countries with the exception of Kenya. holders involved in reforms related to education, domes- Establishment and ownership and scope of activities is tic regulation, trade, and labor mobility in engineering and limited in Tanzania, but is generally unrestricted in other architecture services. Chapter 4: Political Economy of Trade in Professional Services in the EAC 93 TABLE 10: Engineering/Architecture Services Burundi Kenya Rwanda Tanzania Uganda Trade and • Ministries of • Ministries of • Ministries of • Ministries of • Ministries of Commerce Trade, Labor, Trade, Labor, Trade, Labor, Trade, Labor, Trade, Labor, Institutions Commerce, Commerce, Commerce, Commerce, Commerce, Interior, Foreign Interior, Foreign Interior, Foreign Interior, Foreign Interior, Foreign Affairs, Finance, Affairs, Finance, Affairs, Finance, Affairs, Finance, Affairs, Finance, etc. etc. etc. etc. etc. Immigration • Burundi— • Kenyan • Rwanda • Tanzania • Uganda Institutions Department of Constitution Ministerial Immigration Immigration and Legislation Immigration and • Government Orders Acts of 1995 and Board and Citizenship Bureaucracies • Government 1997 Department Institutions Bureaucracies • Government Bureaucracies Higher • University of • University • University faculty Education and Burundi Faculty Senate and Ministry of Certification of Applied Education Boards Science Political and • EAC Institutions • EAC Institutions • EAC Institutions • EAC Institutions • EAC Institutions Regional • Common Market • Common Market • Common Market • Common Market • Common Market Institutions Protocol Protocol Protocol Protocol Protocol • Multi Sector • Multi Sector • Multi Sector • Multi Sector • Multi Sector Council Council Council Council Council • Mutual • Mutual • Mutual • Mutual • Mutual Recognition Recognition Recognition Recognition Recognition Agreements Agreements Agreements Agreements Agreements License • No Data • Engineering • Unregulated • Engineers • Uganda Institute Granting Registration Registration of Professional Professional Board of Kenya Board (ERB) Engineers (UIPE) Associations (ERB) Private Sector • No Market • Howard • No Market • No Market • No Market Operators leading Firms Humphreys leading Firms leading Firms leading Firms • Otieno Odongo • CAS Consultants • Uniconsult Kenya • Sapamo Consultants International • No Data • Association • Institution • Association • Uganda Actors and Stakeholders Professional of Consulting of Engineers of Consulting Association Associations Engineers of Rwanda Engineers of Consulting Kenya Tanzania Engineers (UACE) • Council of the • Institution • Uganda Institution of of Engineers Institution of Engineers of Tanzania Professional Kenya • Tanzania Civil Engineers (UIPE) Engineering • UNABCEC Contractors Association Business/Trade • East African • East African • East African • East African • East African Associations Business Council Business Council Business Council Business Council Business Council • Trade Mark East • Trade Mark East • Trade Mark East • Trade Mark East • Trade Mark East Africa Africa Africa Africa Africa • Kenya Export • Tanzania Promotion Investment Council Center International • World Bank • World Bank • World Bank • World Bank • World Bank Organizations/ • EU • EU • EU • EU • EU Donors • AU • AU • AU • AU • AU • AfDB • AfDB • AfDB • AfDB • AfDB • Bilateral Donors • Bilateral Donors • Bilateral Donors • Bilateral Donors • Bilateral Donors 94 Political economy of regional integration in sub-saharan africa 5. Applied Political Economy include developing and properly managing student loan schemes (as Kenya has implemented and as Uganda and Analysis: A Problem-Driven Burundi are currently considering), as well as devising cost Perspective sharing options which diversify funding sources for both students and universi­ ties—particularly with respect to This section will investigate discrete, problem-driven ques- the shared responsibilities of students, government, on-­ tions facing the professional services sector from a politi- campus services, matching grants, donations, gifts, and cal econ­ omy perspective. Given the regulatory challenges R&D endeavors. highlighted in the preceding discussion, and in line with While these recommendations may provide a solution the problem-driven approach to political economy analy- to existing financial challenges, there remain a number of sis, this analysis will conceptualize four main “problems’’: problems. A key challenge is that the number of students (1) Educational Issues and Constraints; (2) Domestic Regu- attending university in Africa is outpacing the available latory Issues and Con­ straints; (3) Trade Barriers and Labor support, and financial constraints prevent governments Mobility Restrictions; and (4) Liberalization and Regulatory and other potential funders from providing the necessary Cooperation. Drawing on previous Bank studies (World levels of resources to accommodate potential students. At Bank 2010a, 2010b, 2011a, and 2011b), the analysis in this the same time, low levels of cost recovery in Africa (below section intends to highlight key constraints, interests, moti- 10 percent in some cases) have been exacerbated by inter- vations, and incentives—across the structural, institutional, est rate subsidization, long grace periods, poor execution, stakeholder, sectoral, global, and strategic dimensions— and poor governance—leading many students to treat that can help explain the current state of the reforms and loans as they would grants that require no repayment. the respective bargaining dynamics that accompany them. Lastly, most low-income countries in sub-Saharan Africa and in the EAC, in particular, lack capable and efficient legal 5.1 Educational Issues and Constraints systems to collect student loan payments. A second, and related issue faced by EAC countries is Given the increasing demand for professional services, why systemic weakness in upstream secondary school educa­ do the EAC training institutions fail to equip students with tion, which limits the ability of students to gain professional market-relevant skills? In terms of supply of professional skills. Recent reports on services trade in Africa cite the training, why are financial frictions not reduced through general erosion of mathematical skills in all countries as student loan schemes? How can the quality and capacity of a key explanatory factor in the declining number of appli- schools and other training institutions be enhanced? What cants in science, engineering, and technology courses; potential exists to create new educational programs to fill hence, the shortages in the engineering sector. existing gaps? In order to address these upstream problems, efforts should be mobilized to reinforce the quality and capacity of Key Issues schools, especially in mathematics and sciences, including Based on previous reports as well as surveys of provid- developing standards and guidelines for quality assurance. ers and consumers of professional services, there are a International and national experiences related to quality number of related issues, the first of which relates to dif- assurance of secondary and higher education could serve ficulties of potential professionals covering the costs of the as a model for East African countries. One such tool comes relevant education and training programs. The cost of pro- in the form of “educational tuning structures” which rely on fessional education is relatively high in all countries across a certain methodology to (re-)design, develop, implement, the EAC, with the median cost for becoming a professional and evaluate study programs. Importantly, such a meth- ranging from US$ 14,000 to US$ 26,000. odology can serve as a platform for developing reference Given these costs, obtaining a professional qualifica- points at the subject level, such as different educational tion is unaffordable for most of the population in these tracks or profiles within a given field (e.g., engineers, engi- countries, particularly since the market for educational neering technologists, and engineering technicians). loans is not well developed. A key recommendation pro- A final issue related to the supply of professional train- posed in section 2 is to prioritize the development of tools ing in the EAC is related to the capacity and quality of down­ for financing higher education to alleviate the financial stream professional educational institutions. Absence of constraints that prevent individuals from acquiring the rel- these institutions is common in many East African coun- evant professional train­ ing. Options previously highlighted tries. In particular, some countries lack the institutions that Chapter 4: Political Economy of Trade in Professional Services in the EAC 95 offer specialized (post-graduate) courses, for instance in ■■ Stakeholder Drivers: In terms of the variety of programs legal and engineering studies. Moreover, some countries offered—particularly with respect to mid-level profes­ lack professional training institutions that offer academic sionals such as accounting and engineering technicians and professional training courses for middle-level profes- and paralegals—professional associations may have sionals, such as training programs for paralegals. incentives to keep such mid-levels professionals out of Given the undersupply of upstream professional educa­ the workforce in order to safeguard the compensation tional institutions, as well as the varying quality and capac- premia driven by the general scarcity of professionals; ity of existing institutions, existing institutions may have therefore, educational institutions do not have incentives to be improved while new ones may have to be created. to offer such programs. This can be done through the emergence of new educa- tional providers in the same category—so-called horizontal What can be done to enhance the level of collaboration ­ differ­ entiation—operated by for-profit, non-profit, inter- between universities, professional associations, and the national, or local government entities to respond to the private sector to help students acquire the necessary pro­ increased demand for access to higher education. Like- fessional training and facilitate their regional mobility and wise, the range of quantity and quality of educational insti- the recognition of their academic qualifications? tutions can be increased by the emergence of new types of institutions such as polytechnics, professional institutes, Key Issues junior colleges for middle-level professionals—so-called Even if a potential professional is likely to acquire the skills vertical differentiation— to respond to labor market needs and requisite training necessary to become an accounting, for a greater diversity of graduate skills and levels of train- engineering, or legal profession in the EAC, a lack of coordi­ ing. While both horizontal and vertical strategies can be nation between key parties may result in such an individual investigated, expanding the scope for mid-level profes- encountering a great deal of difficulty in finding appropri- sionals, such as paralegals but also accountants and engi- ate employment. According to recent regional reports, the neering technicians, may encounter resistance. absence of links between educational systems, employers, and users of services leads to unmet needs and unem- Political Economy Drivers ployed professionals, and explains the attrition of skills in ■■ Structural Drivers: Given the level of development of several professions. the countries concerned, most educational institutions To counter this challenge, it is necessary that policy operate in a resource and capacity constrained actions encourage collaboration between universi- environ­ment. The scope for funding and expanding ties, professional associations, and the private sectors professional educational programs will necessarily through internships and other related programs that remain dependent on fiscal space for such public can help students acquire skills and practical training. expenditures. Challenges in higher education financing A regional success story is the Structured Engineers affect both institutions and students. The small size of Apprenticeship program (SEAP) for Graduate Engineers programs and their limited scope might thus remain a developed by the Engineers Registration Board (ERB) in serious constraint in the medium- to long-run. Tanzania. ■■ Institutional Drivers: Departments of Education and Unfortunately this program stands in isolation in the Universities may be unable or unwilling to work with region. Underlying this challenge are coordination prob- national or regional student loan boards. On a formal lems faced by employers, professional associations, and institutional level, low levels of cost recovery may remain educa­ tion institutions in educational programs for engi- insurmountable unless the proper governance, credit, neers and accountants. Such problems are exacerbated contractual, and legal remedy issues are addressed. by sectoral constraints, for instance, in the engineering The development of an EAC-wide loan scheme as part sector where high training costs (four years)—in com- of EAC’s Regional Higher Education Policy and Strategy parison with other sec­ tors—make it difficult for potential could help address these issues and also foster regional employers to properly train and mentor future employ- student mobility. On an informal institution level, there ees. If these graduates do not receive help immediately are a variety of incentives for students to treat loans as after graduation, evidence suggests that they will not be grants because of interest rate subsidization, long grace placed in their appropriate sectors and will shift to other periods, as well as poor execution and governance. jobs instead. 96 Political economy of regional integration in sub-saharan africa Political Economy Drivers Key Issues ■■ Stakeholder Drivers: Coordination between key Domestic regulation on the entry and on the operations of insti­ tutions and stakeholders remains limited, with firms, presumably designed to meet social goals, can often respect to universities, employers, and professional undermine competition. This is especially true in profes- associations. In some sectors such as engineering, sional services, where public interest theories argue that apprenticeship opportunities exist in certain countries. qualitative regulatory measures—such as qualification In others, such as accounting and legal services, requirements or exclusive tasks that can be performed practical training remains a double-edged sword, by certain profession­ als—are necessary to guarantee where young graduates must gain experience through high-quality services and avoid adverse selection. While training programs, yet limited availability and lack qualitative entry restrictions may be necessary in some of interest of experienced professions to supervise circumstances, private interest theories caution that such trainees makes it difficult to train young professionals. qualitative regulations may be disproportionate as a result At the same time, professional associations remain of excessive entry requirements set by rent-seeking pro- the dominant actors in training young profes­ sionals fessionals and professional associ­ ations. In addition, if the by designing curricula or providing training and profession gains a monopoly over the organization of the continuous education. The dominance of professional required training, the education of necessary profession- associations thus undermines the role played by the als may be limited. Given these risks, qualitative regulation private sector as well as institutional mechanisms to measures are especially salient in the context of services ensure the participation of employers in the formation trade in the EAC as they may impede the ability of firms of young professionals and professionals to provide services. The most frequent ■■ Sectoral Drivers: Some sectors, such as engineering, measures relate to monopolies of profes­ sional associa- which requires a long period of apprenticeship (three tions over the higher education institutions that provide to four years), are more inclined to devise institutional professional degrees, as well as the delineation of with training programs, as evidenced by the Structured exclusive rights (particularly in legal services) and multiple Engineers Apprenticeship Program (SEAP) in Tanzania. licensing requirements (which disproportionately affect However, for legal and accounting professions, where auditing services). similar practical training is necessary, no similar In order to reduce the negative effects of such require­ arrangements exist. In these contexts, there is a much ments, the recommendations put forth in section 2 suggest larger scope for graduates to remain unmatched to that it is necessary to relax disproportionate cumulative work opportunities. entry qualitative requirements—for example, by narrowing the scope of exclusive tasks in certain professions. While ■■ International Drivers: While some sectors are dom­ such exclusive rights may lead to increased specialization inated by large international corporations (e.g., the “Big of professionals and guarantee a higher quality of service, Four” accounting firms in accounting), other sectors do they can also create monopolies that can have adverse not have market leading firms and the private sectors price and allocation effects, especially if they are granted are highly fragmented among small firms (Kenya is the for services that can be obtained at a lower cost by less- only country with market leading firms in legal and regulated mid­ dle-level professionals. Likewise, multiple engineering services). As a result, there may be fewer licensing require­ ments may hinder entry into the sector. opportunities for recent graduates to be recruited into Last, the control of professional associations may lead to young professionals programs, where private sector higher barriers to entry for professionals and rent seeking firms take a leading role in training young graduates. behavior. 5.2 Domestic Regulatory Issues Political Economy Drivers and Constraints ■■ Stakeholder Drivers: Professional associations Given the increasing demand for professional services, have a monopoly on determining many qualitative why do domestic entry and conduct regulations continue (educational and professional) entry requirements to restrict the operations of services providers in the EAC into professional services. As mentioned, professional market? associations govern the curricula of higher education Chapter 4: Political Economy of Trade in Professional Services in the EAC 97 institutions as well as the delineation of exclusive rights. which restrict competition. With respect to price fixing, Accordingly, this may result in difficulties for mid-level most of the economic literature argues that these regula- professionals to per­ form certain activities, thereby tory instruments can seriously harm competition by elimi- creating rents for those able to gain the necessary nating or reducing the benefits that competitive markets licensing from professional associations. deliver for consumers. Most agree that less restrictive ■■ Sectoral Drivers: Differences emerge across sectors mechanisms, such as better information on the services as exclusive rights are particularly binding for legal provided, could be established. Likewise, private interest services and multiple licensing requirements which theories maintain that there is no justification for prohibit- dis­ proportionately affect accounting and auditing ing advertising that is relevant, truthful, and not mislead- services. Since professional associations determine ing. Instead, advertising fosters competition by informing the scope of exclusive tasks in certain professions, the consumers about different products and allowing them oration between these associations and level of collab­ to make better-informed buy­ ing decisions and can be a market leading firms needs to be further investigated. crucial competitive tool for new firms entering a market. Lastly, with respect to restrictions on business organiza- Similar to qualitative entry restrictions, conduct regula- tion, private interest theories point to the fact that these tions continue to be applied. What can be done to relax regulations are clearly anti-competitive and may harm such regulations to increase the availability of service pro- consumers by preventing providers from developing new viders in the EAC? services or cost-efficient business models. Despite their clear anti-competitive effect, a number of Key Issues national professional associations support the continued use of restrictive conduct regulations. For example, previ- Conduct Regulations—fixed prices, advertising restric- ous literature notes that price regulations are introduced tions, and restrictions on business organization—are and supported by national professional associations, who employed to regulate trade in services in several EAC claim they help prevent the adverse selection problem. countries. With respect to price fixing, fees for professional Likewise, some associations justify advertising restrictions services are negotiated freely between practitioners and by the need to protect consumers and such restrictions clients in accounting and engineering services in almost all may continue to exist within the EAC. Last, in an attempt surveyed countries. However, while few developed coun- tions on business organization, profes- to justify restric­ tries regulate fees for lawyers, fees, and prices of legal sional associations argue that professionals are more services are regu­ lated in Kenya, Tanzania, and Uganda. likely to give independent advice if certain forms of intra- Likewise, although few non-African countries regulate professional partnerships are prohibited, while restrictions prices in engineering service, Tanzania recently introduced on multidisciplinary activities prevent potential conflicts of fee regulations for engineering services. With respect to interests that are detrimental to consumers. advertising prohibitions, several professions in Africa are subject to sector-specific advertising restrictions: account- Political Economy Drivers ing in Kenya, Tanzania, and Uganda, legal services in all examined countries, and engineering services in Tanzania. ■■ Institutional Drivers: Countries across the EAC may In general, East African countries have more severe regula- have different institutions that govern competition, tions on advertising and marketing than most developed consumer protection, and business environment. and developing economies. Last, with respect to restric- Accordingly, it is necessary to better understand the tions on business organization, there are restrictions on institutional set-up as well as the domestic “norms” that business structure in all professional services sectors in support such regulations. most examined countries. These regulations can restrict ■■ Stakeholder Drivers: Across sectors, professional asso­ the ownership structure of professional services compa- ciations seem to be the main influence on maintaining nies, the room for collaboration within the profession and price regulation, advertising prohibitions, and business with other professions, and in some cases the opening of organization requirements. Such measures tend to favor branches, franchises, or chains. the largest and most well-known firms. Keeping conduct The recommendations put forward in section 2 call for regulation in place can thus be viewed as a rent capturing the elimination of disproportionate conduct regulations mechanism for bigger firms that have a stronger voice 98 Political economy of regional integration in sub-saharan africa and can influence professional associations. On a more foreign, which are greater in an integrated regional mar- positive note, the Law Society of Kenya (LSK) has finally ket. Last, regionalization may also make it possible to allowed lawyers to advertise their services as of Febru­ reap economies of scale in regulation and supervision, ary 2014. The High Court decided that the advertising particularly where national regulatory agencies face skill prohibition is unconstitutional and denied consumers constraints; it could also reduce the possibility that private of legal services access to information which could help sector interests capture regulation. them choose their favorite advocates and also impeded To benefit from regional integration, explicit trade barri- access to justice. This High Court decision triggered ers need to be removed. A gradual liberalization approach the debate on regulated advertising. The LSK Council could start by articulating the economic and social moti- has now approved certain forms of advertising of legal vation for nationality and residency requirements. The services but many limitations still remain in place (for objectives of nationality and residency requirements may example, information regarding fees or television ads be achieved by less discriminatory measures such as (a) are still prohibited). Despite relatively high usage of require foreign service providers to undergo professional pro­fessional services (for example, 77 percent of the assessment when nationality requirement is used to ensure interviewed firms in seventeen COMESA countries as professional competence; and (b) appoint a representa- part of the World Bank Business Surveys conducted tive agent, or liability insurance, in lieu of physical pres- in 2012 indicated that they use accounting services, ence or residency requirement. How far and how quickly while 50 percent indicated that they used legal and each country proceeds will depend on the political power engineering services), the influence of the private sector of users and incumbent providers of specific professional seems rather limited across all examined professional services (an issue that merits deeper investigation than has services subsectors. so far been possible). Likewise, the EAC should develop a transparent and consistent framework for accepting pro- 5.3 Trade Barriers and Labor Mobility fessionals with foreign qualifications. Last, where foreign Restrictions professionals are completely barred from practicing, it would be beneficial to recognize professional qualifications Why do international trade barriers—particularly those from other member countries that have similar standards related to nationality/residency requirements and restric- to those applied in the East African countries. tions on the form of establishment—continue to impede the flow of services in the EAC? With respect to immigra- tion issues within the EAC, what are the underlying inter- Political Economy Drivers ests surrounding nationality and residency requirements? ■■ Institutional Drivers: In terms of immigration require­ ments, a number of institutional actors have a voice in Key Issues the regulatory process. Among them are the relevant The fragmentation of regional markets for professional immigration agencies as well as supporting ministries ser­vices and professional education in East Africa by such as the Ministry of Foreign Affairs, Labor, and Com­ restrictive policies and regulatory heterogeneity prevents merce. Accordingly, it is necessary for these institutions countries from exploiting gains from trade based on com- to develop a coherent policy governing the movement parative advantage, as well as gains from enhanced com- of foreign workers and firms with the domestic context, petition and exploiting economies of scale. Differences in as well as the business arrangements they made with national endowments of professionals and the capacity for domestic professional service providers. profes­ sional training—reflected in differences in earnings ■■ Stakeholder Drivers: Individual actors play a key role of profes­ sionals and the costs of training across coun- in advocating for immigration and residency require­ tries—suggest a substantial potential for trade and for ments of firms and professionals. Especially important large gains from eliminating impediments to trade. Deeper are the interested incumbent providers of professional regional integra­ tion would enhance competition between services which have the capacity to lobby key institu­ service providers, allow providers to exploit economies of tions for easier or more restrictive requirements. A key scale, especially in professional education, and produce a motivation for entrenched domestic providers would wider variety of ser­ vices. Also playing a key role are the be to reduce access, and hence competition, from prospects for attracting investment, both domestic and foreign professionals and firms. Chapter 4: Political Economy of Trade in Professional Services in the EAC 99 ■■ Sectoral Drivers: Despite the signing of the Common ultimately abolishing the policy. Where investments by Market Protocol (CMP), a number of recurrent nonprofessionals are not allowed, relax the prohibition challenges exist. In terms of explicit barriers, the and substitute it with less restrictive policies. Relax abso- most restrictive measures for all modes of services lute prohibition on foreigners from forming partnership supply are applied in legal services. The legal sector with local professionals. Instead, foreign and local part- remains largely closed to foreign participation, and ners should be jointly liable, and their liability for the part- nationality requirements, which typically ban foreign nership’s debts should be unlimited. Last, governments entry, are imposed in several coun­ tries on providers should consider adjustments in policies where the social of legal services. Likewise, economic needs tests or and economic motivations are ambiguous. This applies to labor market tests are applied by several countries mandatory membership in local professional associations, in accounting and legal services. Restrictions on the as well as mandatory partnerships with or hiring of locals of entry of foreign accounting and law firms exist in all the same profession within the same area of competence. countries in various forms (foreign ownership limits or restrictions on the form of entry). Political Economy Drivers ■■ International Drivers: Issues related to foreign incor­ ■■ Stakeholder Drivers: Foreign establishment is greatly poration are closely tied to a country’s immigration influenced by stakeholders, particularly entrenched policy. While governed by various institutions and domestic private interests keen on avoiding foreign differing legislation across EAC states, such policies will competition. Incumbent firms would be expected be informed by security concerns, particularly given to avoid undue foreign competition which can the presence of fragile and conflict affected states. In subsequently affect their domestic market share and addition to well-documented histories of insecurity, expected profits. Likewise, professional associations recent events, particularly those related to the security have a disincentive to support regulations which would situation in Kenya, can have an effect on the stance make it easier for foreign firms to render their services. that institutions take with respect to immigration. ■■ International Drivers: A country’s willingness to Aside from immigration, foreign investment constitutes increase foreign investment might run counter to the another key area that can influence immigration policy. desire of domestic firms to protect their market positions. Within an integrated regional market, both domestic Nevertheless, the foreign investment prospects may and regional investment opportunities can affect policy encourage regulators to increase the opportunities for related to immigration and incorporation. foreign entities to incorporate or otherwise cooperate ■■ Strategic Drivers: Immigration has a close relationship with existing firms and professionals. to a country’s strategic interest in engaging with regional and international trade agreements. Quantitative 5.4 Liberalization and Regulatory Cooperation tions are informed by labor market tests and restric­ economic needs assessments in many countries. Despite the signing of the CMP and the MRAs, why do the Should a domestic industry lobby for protection, this applied policies—particularly those related to the move- will have a great effect on the short- to medium-term ment of providers—continue to impede professional ser- immigration policies. vices in the EAC? What are the challenges regarding the implementation of the CMP and the MRAs in professional In addition to issues related to the temporary entry of foreign services? And how can we accelerate implementation? suppliers, why do forms of commercial establish­ ment con- tinue to impede the flow of professional service in the EAC? Key Issues The five East African countries have made progress toward Key Issues removal of explicit trade barriers and the mutual recogni- The recommendations put forth in section 2 suggest that tion in professional services through the East African Com- it is necessary to minimize restrictions on forms of estab- munity CMP negotiations. The CMP, adopted by the Multi lishment. Likewise it is necessary to develop transparent Sector Council in 2009, includes commitments related to criteria and procedures for applying economic needs professional services. Also the CMP includes an annex on a testing and other policies; set a timeline for easing and framework agreement on mutual recognition agreements 100 Political economy of regional integration in sub-saharan africa (MRAs) of academic and professional qualifica­ tions. Regional Qualifications Framework. This framework will However, there are numerous challenges related to the be a generic instrument for harmonization of higher implementation of CMP commitments and the MRAs. For education and training systems in East Africa, and for example, the key stumbling block related to the imple­ facilitating mutual recognition of qualifications among mentation of the CMP commitments is the linkage that the EAC Partner States. The process to develop the has been made with regard to commitments on the tem- regional qualifications framework started in Decem­ ber porary movement of service suppliers who are nationals 2011 and is expected to be completed in December of Partner States (“natural persons”) with the provisions 2014. The IUCEA is also developing appropriate legal on the free movement of workers. The full-fledged MRA provisions to guide and safeguard the principles for would have to cover education, examinations, experience, operationalization of the qualifications framework. The conduct and ethics, professional development and re-­ regional quality assurance system and the qualifications certification, range of practice, and local knowledge and an framework once fully developed can transform East effective implemen­ tation would require a preceding sec- Africa into a common higher education area. toral benchmarking of current regulatory frameworks. ■■ Institutional Drivers: Professional associations have In addition, as shown in World Bank (2015), the agree­ been mandated to draft the MRAs. However, it seems that ments were not initiated formally at the regional level. This the services negotiators and the EAC Secretariat have has left the instruments resulting from these agreements not been involved in the MRAs discussions. Although in legal limbo. Although the parties involved have compe­ the signed agreements have all been presented to the tence in relation to professional qualifications and licens- EAC Council of Ministers, they have not yet been given ing at a domestic level, they were not granted the power any formal recognition as legal instruments of the EAC. to conclude these international agreements. The lack of Negotiations on the agreements were not formally true “treaty” status for the MRAs means that they cannot endorsed by ministers and the authority to negotiate require competent authorities to ignore existing domes- was not officially delegated to the relevant parties. The tic provisions (such as nationality requirements) that clash lack of stakeholder consultations and the absence of with the MRA requirements. Issues arising from this lack a clear mechanism at the EAC regarding procedures of legal recog­ nition have subsequently become apparent for reviewing and adopting MRAs generate delays with leading to key implementation challenges. their implementation. The EAC Council of Ministers has recognized some ■■ Sectoral Drivers: There seems to be disconnect between broader issues that have prevented existing MRAs from CMP commitments and MRA provisions in several sectors. being truly effective. Reflections are underway, as a result, For example, in accounting services, at least country one on how commitments on free movement of skilled profes- signed the MRA still imposes nationality requirements sional work­ ers, which are essential to the success of the for the provision of certain accounting services. Similarly, MRAs, can be delinked from the wider issue of free move- work permit requirement and restrictive immigration ment of workers. rules challenge the implementation of the MRAs in all sectors (given the importance of temporary movements Political Economy Drivers of professionals to provide these services). ■■ Stakeholder Drivers: The benchmarking of ■■ International Drivers: International actors such as the qualifications and licensing across countries poses TMEA, the World Bank, and other development partners significant prob­lems in the EAC. Some countries may have programs to foster regulatory cooperation and need to raise their standards beyond their current education in the region. Local stakeholders may request level to reach a jointly agreed minimum standard. All concrete assistance to accelerate implementation of relevant governmental and professional organizations reforms in professional services. would need to take part in defining such requirements. It seems that the MRAs were negotiated without undertaking such benchmarking exercises complicating 6. Conclusion their effective implementation. Stakeholders involved in the implementation of these MRAs could learn from This chapter attempts to identify the structural, institu- the experience of the education sector. The Inter- tional, stakeholder, sectoral, strategic, and international University Council for East Africa (IUCEA) is currently drivers that explain the status of reform and regional inte- developing a Regional Quality Assurance System and a gration in professional services in East Africa. Chapter 4: Political Economy of Trade in Professional Services in the EAC 101 The preceding analysis has demonstrated that struc- and Commerce. Accordingly, it is necessary for these insti- tural drivers such as the level of development of the tutions to develop a coherent policy governing the move- five EAC countries poses constraints for higher education ment of foreign workers and firms within the domestic financing and the capacity of various actors to implement context, as well as the business arrangements they made regulatory reforms. with domestic professional service providers. Stakeholder drivers are particularly important in all Sectoral drivers can explain why certain professions examined sectors. A recurrent theme is the important role (i.e., accounting and auditing), have registered more rapid of professional associations in both maintaining restric- progress with reforms than others. For example, some tive regulations and accelerating the implementation of sectors, such as engineering, which requires a long period reforms. For example, professional associations may have of apprentice­ ship (three to four years), are more inclined incentives to keep mid-level professionals out of the work- to devise institutional training programs, as evidenced by force in order to safeguard the compensation premia the Structured Engineers Apprenticeship Program (SEAP) driven by the general scarcity of professionals; creating in Tanzania. However, for legal and accounting profes- disincentives for educational institutions to offer training sions, where similar practical training is less stringent, no programs for engineering technicians or paralegals. Fur- similar arrangements exist. In these contexts, there is a thermore, professional services seem to be the main pro- much larger scope for graduates to remain unmatched to ponents of price regulations, advertising prohibitions and work opportunities. Differences also emerge across sec- other trade restrictions that generate rents to incumbents tors when it comes to regulatory issues. Trade barriers and or large firms that have a stronger voice and can influence regulations for instance are particularly restrictive for legal professional associations. Another important finding is that services—the nature of the profession that limits its expo- coordination between key institutions and stakeholders sure to foreign competition as well as the strength of bar such as uni­ versities, employers, professional associations, associations might explain such outcomes. and trade ministries remains limited, hampering national The chapter also highlights the positive role of these reforms as well as the implementation of regional commit- drivers in implementing national and regional reforms. ments. For example, professional associations have been For example, the Inter-University Council for East Africa mandated to draft the MRAs. However, it seems that the (IUCEA) could serve as an example for the stakeholders services nego­ tiators and the EAC Secretariat have not been and institu­tions involved in the implementation of regional involved in the MRAs discussions. The lack of stakeholder reforms. In 2009 the East African Legislative Assembly consultations and the absence of a clear mechanism at (EALA) enacted the IUCEA Act 2009 and integrated IUCEA the EAC regarding procedures for reviewing and adopting into the EAC operational framework. The Act spells out the MRAs generate delays with their implementation. objectives, functions, institutional set-up, and systems of Evidence from the region suggests that institutional governance and management of IUCEA. Similar arrange- drivers matter. For example, Departments of Education ments between professional association, regulators, and and Universities may be unable or unwilling to work with ministries involved in the reform of professional services national or regional student loan boards. On a formal could clarify responsi­bilities, lead to institutionalized coop- institutional level, low levels of cost recovery may remain eration, and accelerate the implementation of MRAs. insurmountable unless the proper governance, credit, International actors such as the TMEA, the World Bank, contractual, and legal remedy issues are addressed. The and other development part­ ners have programs to foster development of an EAC-wide loan scheme as part of EAC’s regulatory cooperation and education in the region. Local Regional Higher Education Policy and Strategy could help stakeholders may request concrete assistance to acceler- address these issues and also foster regional student ate implementation of reforms in professional services. mobility. Also, EAC countries may have different institu- tions that govern competition, consumer protection, and the business environment. Accordingly, it is necessary to Appendix 1 Conceptual Issues: better understand the institutional set-up as well as the Regulatory Measures Affecting domestic “norms” that support such regula­ tions. In terms of immigration requirements, a number of institutional Professional Services actors have a voice in the regulatory process. Among them Skills shortages and skills mismatches as well as failures are the relevant immigration agencies as well as supporting and poor export outcomes in professional services mar- ministries such as the Ministries of Foreign Affairs, Labor, kets can be explained by inadequate policy measures 102 Political economy of regional integration in sub-saharan africa related to education, trade, domestic regulation, and I. The Typical Market Failure in Professional migration. Lim­ iting the analysis to the typical trade policy Markets Is That of Information Asymmetry. areas—namely trade policies and domestic regulation— Professional services require that practitioners have a would only partially address the diagnosed problems. high level of technical knowledge, and many knowledge-­ It is also important to analyze the education chal- intensive professional services can be considered credence lenges in order to remedy the origin of the skills shortages goods—that is, the clients may not have the knowledge to and skills mismatches. Similarly, the general immigration judge the quality of the services they purchase. restrictions (in addition to the barriers affecting mode A possible market-based correction mechanism for 4) have to be analyzed to address the free movement of this problem is the reputation premium. However, in many professionals that is necessary for the provision of profes- professional services reputation is not enough to provide sional services. information about quality to consumers. This can result in overall quality deterioration because providers of the Education Policies highest quality, who charge higher prices, are driven out of the market.4 Therefore, public interest theories assert Because professional services require a skilled workforce, that education and qualification requirements, other qual­ the quality of education matters. Possible education- itative entry requirements such as exclusive tasks reserved related barriers can be the financial constraints that may to professionals, or advertising regulations are needed to prevent individuals from acquiring professional education, protect consumers. Similarly, public interest theories claim or limita­tions in the capacity and quality of professional that regulatory intervention is needed to address the prin­ institutions that may prevent students from acquiring cipal-agent problem that can generate supplier-induced market-relevant skills. ­ demand: the agent (services provider) has an incentive to over-supply quality in order to charge higher prices even Domestic Regulation if the principal (consumer of services) would be better off with a lower quality service at a more reasonable price. Professional services have traditionally been subject to a Such adverse selection issues are often addressed by high degree of regulation. These regulatory measures are a (minimum) standards or price regulation result of direct governmental regulation and rules adopted by self-regulatory bodies, and range from qualitative and II. The Second Justification for Regulatory Intervention quantitative entry regulation to conduct regulation. Entry in Professional Markets Is the Concept of Externalities. regulation includes educational and professional qualifica­ tion requirements, exclusive or shared exclusive rights to The use of professional services may bring benefits to provide services, ownership restrictions, and restrictions users but also to third parties. For example, an accurate on the numbers of providers. Conduct regulation consid- audit can help companies obtain credit while also helping ers regulations governing business structure and multidis- creditors and investors make informed lending and invest- ciplinary practices, pricing, and advertising. These can be ment decisions. applied to both domestic and foreign providers. However, several providers and potential users, partic­ While public interest theories claim that many of ularly small enterprises, may be unaware of the private and these regulatory measures are justified to address social benefits that the use of professional services offers; market fail­ ures—such as (1) information asymmetries; therefore, intervention in many professional service mar- (2)  externalities; (3) lack of economies of scale; and kets tries to ensure that positive social externalities occur (4) equity concerns—pri­ vate interest theories have been and negative externalities are avoided. Negative externali- critical of many aspects of professional regulation and, ties can be addressed through liability regulations—but this especially, of self-regulation.3 4 This process of ”adverse selection” results in overall quality deterioration, which is described as a “market for lemons” in Aker- 3 The classic references are Stigler (1971) and Posner (1974). lof (1970). Chapter 4: Political Economy of Trade in Professional Services in the EAC 103 approach operates ex-post and has limited success. Ex-ante and/or multilateral liberalization (along with mutual recog- quality requirements, such as standards related to educa- nition agreements) can help compensate for underdevel- tion and training, seem preferable to address externality oped local services markets. issues. While public interest theories claim that many of these Positive externalities include public goods. Many pro­ regulatory measures are justified to address the above fessional services exhibit good public characteristics and market failures private interest theories have been criti- create positive externalities for parties not involved in the cal of many aspects of professional regulation and self-­ transaction. For example, legal professionals may gener- regulation, in particular the protectionist outcomes they ate important positive externalities that benefit society often produce. in general by defining and enforcing property rights. In For example, public interest theories argue that qual­ a free market public goods tend to be under-produced, itative regulatory measures are necessary to guarantee since the producer cannot exclude non-paying beneficia- high-quality services and avoid adverse selection. Qualita­ ries. To guarantee that public goods are provided, states tive entry restrictions may thus be necessary. But private may decide to enact regulations on the provision of public interest theories warn that qualitative regulations may be goods. disproportionate as a result of excessive entry require- Market power can be an additional reason for regula­ ments set by rent-seeking professionals and professional tory intervention. In certain professional services, such as associ­ ations. In addition, if the profession gains a monop- accounting, leading firms (often foreign-owned) have a sig­ oly over the organization of the required training, the edu- nificant share of the market and a large gap exists between cation of necessary professionals may be limited. the average leading firm and the average other firm. These It is difficult to determine whether the qualitative market structures may be a result of regulatory failure, require­ ments are disproportionate. Several examples of such as uniform standards or licensing controls at mul- typical restrictive qualitative requirements are: restrictions tiple levels. In such cases, interventions may be needed to on access to the profession, mainly due to the monopoly address inadequate direct or indirect regulation. of professional associations over training institutions, or multiple certifica­ tion requirements (for instance, a coun- III. Regulating Markets for Professional Services May Also try’s banking and insurance laws may require that all com- Help Public Interest Goals Toward Equity. panies use auditors approved by the banks or insurance institutions—generally auditors affiliated with one of the Markets sometimes exclude certain actors from access to “Big Four” or other large companies—to prepare the finan- education or services. Therefore, governments or profes­ cial statements for outside investors or other external par- sional associations justify regulatory measures, such as ties to obtain a credit; these requirements may limit the price regulation, to ensure access to services for low- access of smaller suppliers to the market). income consumers. Also, highly skilled professionals in all sectors have exclusive rights to perform certain activities (e.g., audit- IV. Finally, the Lack of Economies of Scale for ing, representation of clients before courts, advice on Practitioners and Professional Services Markets legal mat­ ters, feasibility studies, design, and planning). The May Be Used to Justify Regulatory Interventions argument in favor of exclusive rights is that they can lead in Professional Services. to increased specialization of professionals and guarantee The small size of the domestic market may prevent the a higher quality of service. But the negative price and allo- development of large professional service sectors, includ- cation effects of exclusive rights, which act as monopolies, ing the skills base. For example, local business service can be substan­ tial, especially if they are granted for stan- providers often don’t have the expertise to support man- dardized services that can be provided at a lower cost by ufacturing exporters. Also, professional service sectors less-regulated or non-regulated providers. may lack investment from foreign firms. In such cases, Furthermore, price regulations are introduced and it is essential to (a) identify unnecessary measures and sup­ ported by national professional associations, who trade barriers that prevent local companies from exploit- claim they help prevent the adverse selection problem. ing economies of scale, and (b) examine how regional But most of the economic literature states that these 104 Political economy of regional integration in sub-saharan africa regulatory instruments can seriously harm competition by Explicit Trade Barriers eliminating or reducing the benefits that competitive mar- The major share of the international trade in professional kets deliver for consumers. Most agree that less restrictive services takes place through commercial presence and mechanisms, such as better information on the services through the temporary presence of natural persons. Thus, provided, could be established. most restrictions faced by professional services exporters Public interest theories justify advertising restrictions will relate to mode 3 and mode 4 in GATS terminology. by the need to protect consumers. But private interest Typical restrictions affecting commercial presence in pro- theories maintain that there is no justification for pro- fessional services include the following: hibiting advertising that is relevant, truthful, and not misleading.5 Instead, advertising fosters competition by ■■ An economic needs test for the approval of foreign informing consumers about different products and allow- investment ing them to make better-informed buying decisions. It ■■ Numerical quotas on the number of operating licenses is also stressed that advertising, especially comparative available to providers of professional services advertising, can be a crucial competitive tool for new ■■ A joint venture requirement for the supply of profes­ firms entering a market. sional services Finally, restrictions on the business structure in all pro­ fessional services—for instance, regulations that ■■ Regulation of contracts by value and number through restrict the ownership structure of professional services an annual licensing system companies, the room for collaboration within the profes- ■■ Nationality or residency requirements for foreign sion and with other professions, and in some cases the estab­lishment for companies providing professional opening of branches, franchises, or chains—are justified services by professional associ­ ations with the argument that pro- ■■ A requirement that foreign businesses hire specific fessionals are more likely to give independent advice if ratios of domestic staff to foreign staff certain forms of intra-profes­ sional partnerships are pro- hibited, and that restrictions on multidisciplinary activities ■■ A reservation of some service sectors or activities for prevent potential conflicts of interests that are detrimen- nationals or residents. tal to consumers. But private interest theories stress that these regulations are clearly anti-competitive and may The supply of professional services through mode 3 will harm consumers by preventing providers from develop- often be accompanied by mode 4 supply to provide skilled ing new services or cost-efficient business models. For and professional services directly to projects and to main- example, these regulations might prevent lawyers and tain local offices. Professional service firms use a variety of accountants from providing integrated legal and accoun- professionals, such as high-skilled auditors, law­ yers, engi- tancy advice for tax issues. In general, restrictions on neers, and specialized technicians. Restrictions on mode 4 collaboration between members of the same profession may also arise from a country’s overall immigration policy seem to be less justifiable than restrictions on collabo- or specific labor market conditions. The following are com- ration between members of different professions where mon examples of conditions for approving the entry of ser- there is a strong need to protect the independence and vice suppliers: liability of professionals. ■■ Labor market testing Guidance on whether the regulatory measures are ■■ Residency requirements for intra-corporate transferees disproportionate can be obtained from regulatory impact and a requirement that the foreign company employ assessments, stakeholders’ consultations, and business specific numbers of local staff surveys. ■■ Authorization subject to the non-availability of locals ■■ Authorization subject to performance requirements (employment creation, the transfer of technology, the level of investment). 5 Stigler (1961) has argued that advertising by the providers of services can substitute for a large amount of searching efforts by The deployment of professionals for temporary assign­ a large group of consumers. ments in export markets separately or as a complement Chapter 4: Political Economy of Trade in Professional Services in the EAC 105 to foreign direct investment is common in these sectors. Mansfield, Edward, Helen Milner, and Jon C. Pevehouse. 2008. The movement of natural persons is a sensitive issue in Democracy, Veto Players, and the Depth of Regional Inte­ many countries because of illegal immigration and security gration, World Economy. 31(1): 67–96. concerns. OECD International Drivers of Corruption: A Tool for Analysis (OECD 2012). Finally, trade in selected professional services, such Putnam, Robert. 1988. “Diplomacy and Domestic Politics: as engineering consultancy services, can be provided via The Logic of Two Level Games.” International Organization mode 1 by using mass communications systems (post, 42(3): 427–460. fax, telephone, Internet). The principal restrictions on VanGrasstek, Craig. 2011. “The Political Economy of Ser­ the cross-border supply of professional services are that vices in Regional Trade Agreements.” OECD Trade Pol­ (a)  the services be certified by locally registered service icy Papers, No. 112, OECD Publishing at http://dx.doi providers and (b) cross-border service providers already .org/10.1787/5kgdst6lc344-en. have a commercial presence in the importing country. World Bank. 2010a. (Dihel, Nora, Ana M. Fernandes, and Aaditya Mattoo). 2010. Reform and Regional Integration of Professional Services in East Africa: Time for Action, Wash- Immigration Policies ington DC: The World Bank. http://documents.worldbank The trade-migration linkage is an important part of the .org/curated/en/2010/10/13228933/reform-regional- integration-professional-services-east-africa-time-action debate on migration reform. Trade policy officials should World Bank. 2010b. (Dihel, Nora, Ana M. Fernandes, Aaditya not neglect the immigration and labor market perspectives Mattoo, and Nicholas Strychacz) Towards an East Afri­ when considering temporary entry or mode 4 issues. Poli­ can Reform and Regional Integration, Trade Policy Note 5, cies related to visas, work permits, and treatment of for- Washington DC: The World Bank. https://openknowledge eign workers must be considered. .worldbank.org/handle/10986/10158 World Bank. 2011a. (Dihel, Nora, Ana M. Fernandes, and Aaditya Mattoo). Harnessing Regional Integration for References Trade and Growth in Southern Africa, Washington DC: The World Bank. http://siteresources.worldbank.org/INTRA Brenton, Paul, Nora Dihel, Larry Hinkle, and Nicholas Strychacz. NETTRADE/Resources/239054-1239120299171/5998577- 2010. “Africa’s Trade in Services and the Opportunities and 1254498644362/6461208-1300202947570/SA_Regional_ Risks of Economic Partnership Agreements.” Africa Trade Integration.pdf Policy Notes No. 6. World Bank, 2011b. (Dihel, Nora, Ana M. Fernandes, Aaditya Brenton, Paul, Elisa Gamberoni, and Catherine Sear. 2013. Mattoo, and Nicholas Strychacz). Towards a Regional Women and Trade in Africa: Realizing the Potential. Washing- Integration of Professional Services in Southern Africa, ton, DC: The World Bank. Trade Policy Note 10, Washington, DC: The World Bank. Byiers, Bruce, Jan Vanheukelom, and Quentin de Roquefeuil. http://documents.worldbank.org/curated/en/2010/ 2013 (draft). “Arguing a Political Economy Approach to 11/13904622/towards-regional-integration-professional- Regional Integration.” services-southern-africa Fritz, Verena, Kai Kaiser, and Brian Levy. 2009. Problem-Driven World Bank. 2015. East Africa Common Market Scorecard. Governance and Political Economy Analysis: Good Practice Washington, DC: The World Bank. Framework. Washington, DC: World Bank. Gilpin, Robert. 2001. Global Political Economy: Understanding the International Economic Order. Princeton: Princeton Uni- versity Press. 106 Political economy of regional integration in sub-saharan africa 107 Chapter 5: The Political Economy of Trade Facilitation in Eastern and Southern Africa 1. Introduction physical infrastructure including ICT equipment and soft- ware and providing technical assistance. Sub-Saharan Africa has a long record of supporting The focus on physical infrastructure (for example, regional integration and while there has been some suc- building new border crossings) and technical assistance cess in lower­ ing and removing tariffs a plethora of non- risks deflecting attention from asking a number of the tariff measures remain in place, and trade costs are high more fundamental questions as to why trade is regulated relative to other regions of the world. A strong political in a specific way in the country under review. This may commitment to deepen regional integration and develop- include asking which Ministries and Agencies determine ment over the past four decades has not been matched by and implement the regulations, identifying the opportu- implementation on the ground. Removing barriers to trade nities and incentives as well as the constraints and disin- despite high level political commitments remains elusive centives facing the different actors involved in the trade and continues to be the exception rather than the norm. process, and accounting for the factors determining the Why has trade facilitation reform proved so difficult in implementation of trade facilitation measures. Further many countries in sub-Saharan Africa? Specific initiatives why have some low-income countries been able to signifi- aimed at modernizing customs, enhancing cross border cantly reduce trade costs despite continuing to experience cooperation, launching national single windows, and intro­ human resource and capital constraints? ducing risk assessment are all recognized as technically This chapter seeks to show how adopting a political sound initiatives yet implementation has been very chal- economy analysis (PEA) approach to trade facilitation may lenging. Ministerial meetings contain frequent references begin to answer these questions. Over the past decade to remov­ ing and eliminating non-tariff barriers, year after donors have increasingly adopted PEA as a tool to better year, with little apparent improvement. Why have many understand specific institutional problems or constraints commitments to reform trade facilitation been circum- with the objective of identifying how to support the vented, repeatedly deferred, or simply stonewalled? Com- momentum for change. Examples include the World Bank’s mon explanations include a lack of political will, a shortage “Problem Driven Governance and Political Economy Analy- of technical capacity, and the binding constraint of limited sis,” the DFID “drivers of change,” the OECD “Governance financial resources. These are not mutually exclusive and Assessments,” and the recent EU approach to assessing indeed it is possible that, in varying degrees, all may be and addressing sector level governance issues. The bur- applicable. geoning literature on the political economy of reform has Justifying the lack of progress on trade facilitation as gradually increased in sophistication from models focusing a consequence of exogenous constraints, should be sub- on aggregate welfare gains and losses, to ones address- jected to scrutiny. Since placing the “blame” on factors ing distributional issues and identifying relative degrees outside the scope of the agencies and actors responsible of power. More recent sec­ tor specific models include for implementation enables these agencies to continue to time inconsistency, power and information asymmetry, publicly commit to change while continuing with the status ­ principal-agent issues, and credible commitment issues. quo. Attributing the constraints to external and exogenous PEA has provided valuable insights into approaches factors has also resulted in the International Cooperating to decentralization, the water sector, energy policy, the Partners (ICP) responding with additional funding to assist design of effective public health campaigns, and the deter- with implementing trade facilitation through enhancing mination of tariff reforms to mention a few. Trade facili- tation which encompasses political, economic, business, administrative, technical and technology issues continues Robert Kirk, Consultant, International Development Group to be viewed rather one-dimensionally as essentially a 108 Political economy of regional integration in sub-saharan africa technocratic reform that will unfold axiomatically once the pointers for programs targeting trade facilitation reform, funding and capacity building are in place. This assumption and makes recommendations for further detailed case should not be left unchallenged. Technical characteristics study assessments of specific trade facilitation instru- invariably have political implications and understanding ments using a PEA. who benefits and who loses, or who perceives they will benefit or lose can assist in improving implementation and service delivery. In brief, the technical is political and that 2. Characteristics of Trade applies to the imple­ mentation of trade facilitation reforms. Facilitation This chapter seeks to provide insights into the resis- tance to trade facilitation reforms at the national level. It Trade facilitation has been defined as “the plumbing of aims to identify the interests of the different stakeholders international trade”—it is necessary for trade to flow involved in trade facilitation and show how their interests smoothly and is an essential building block for efficient are represented. How do government policy makers weigh regional inte­ gration. The reference to plumbing is appro- the divergent views of these stakeholders? Which factors priate since it encapsulates two of the traditional charac- have contributed to the persistence of trade barriers and teristics of trade facilitation—it is a necessary part of any held back reform? How are specific stakeholders able to trade agreement and while always present it is not always influence and block reform? at the forefront. When we seek to define the term “trade This chapter surveys a number of trade facilitation facilitation” in terms of specific tasks or activities it becomes initiatives in Southern and Eastern Africa in the context apparent that the definition depends on the context. In the of multilateral and regional commitments and aims to context of the WTO trade facilitation is defined rather nar- address four key questions. Firstly, can a PEA assist in rowly with a focus on border management procedures. explaining slow or the non-implementation of trade facili- Others, including the Asia Pacific Economic Cooperation tation initiatives? Secondly, does adopting a PEA have (APEC), adopt a much broader definition that includes all potential program­ matic implications for the different policies, regulations, and procedures that impact on trade stakeholders including governments and ICPs? Thirdly, costs. The broader definition encompasses the WTO defi- can a PEA assist in identi­ fying practical initiatives that will nition while also allow­ ing for the inclusion of measures support implementation? Fourthly, what does adopting a impact on transport and logistics efficiency, the treatment PEA approach mean for the existing trade facilitation ini- of regulations governing standards, and conformity with tiatives including A4T, the DTIS, and National Trade Facili- international regulations. The broader definition is opera- tation Assessments? tionally more useful as it more comprehensively captures The chapter is organized in four sections. Following the factors determining supply chain efficiency. the introduction the second section outlines the charac- The rise to prominence of trade facilitation within the teristic elements of trade facilitation, and draws attention World Trade Organization (WTO) over the past twenty to the importance of adopting a more comprehensive def- years culminated in the breakthrough agreement on trade inition based on the trade costs involved in the physical tion in Bali in December 2013. Trade facilitation is facilita­ move­ ment of goods. Section 3 looks at trade facilitation not new, the preamble to the General Agreement on Trade through the political economy lens and places the recent and Tariffs (GATT) made explicit reference to “other,” non- WTO Trade Facilitation Agreement in the context of longer tariff barriers to trade and there is a long history of agree- term negotiations at the multilateral and regional levels ments seeking to simplify trade procedures. Nevertheless and the broader goal of increasing competitiveness. This trade facilitation (narrowly defined) with its focus on the is followed in Section 4 with a preliminary outline of a PEA procedural, admin­ istrative, and operational details differs to a series of specific examples, including the regional cus- from “traditional” trade negotiations which historically have toms bond guarantee, border management cooperation, focused on tariffs. and national quality infrastructure and technical barriers For the WTO trade facilitation is concerned with the to trade. These examples represent exploratory sketches simplification and harmonization of international trade based on secondary (and publicly available) publications pro­cedures. The WTO training note defines trade pro- and reports and serve to illustrate the merits of adopting a cedures as “activities, practices and formalities involved more comprehensive PEA which would involve interviews in collecting, presenting, communicating and process- with all the stakehold­ ers. The final section of the report ing data required for the movement of goods in interna- outlines the preliminary lessons, presents indicative tional trade.” The essential features of trade facilitation Chapter 5: The Political Economy of Trade Facilitation in Eastern and Southern Africa 109 include simplifying, standardizing, and harmonizing all 3. Approaching the Political the procedures and related information requirements involved in moving goods across borders. Trade facilita- Economy of Trade Facilitation tion in regional and multilateral trade agreements refers The problem driven approach to political economy has to the procedures and controls governing the movement three stages: identifying the challenge, mapping the rele- of goods across borders with the aim of minimizing costs vant institutional and governance structures, and identify- (reducing “red tape”) while ensuring public policy objec- ing the political economy drivers and potential roadblocks tives are satisfied. holding back reforms (change). Essentially this approach In summary the key principles of trade facilitation in the seeks to understand why the existing institutional arrange- WTO include: ments do not support the reform process. With a focus on ■■ Transparency and predictability; structures, institutions, and actors this approach results in ■■ Simplification and international harmonization of customs a focus on effective communication strategies for build- procedures; and ing support for change (how to build a constituency for change). ■■ Increased (and effective) cooperation between customs Using PEA as a key development management tool in and other government offices. trade facilitation is still relatively novel. A Google search for trade facilitation and political economy returned two Effective trade facilitation seeks to reduce transit times stud­ ies. The World Bank approach to PEA adopts the fol- and costs, increase the reliability of transit and border lowing sequence. The analysis begins by clearly defining clearance times, and lower clearance costs while ensuring the chal­ lenge and mapping all the institutions and actors compliance with existing regulations. in order to locate a focal point for change. The focal point Individual customs territories (sovereign nations) have for change will then begin to actively communicate the developed their unique regulations, procedures, and benefits of collective action with other stakeholders. Once admin­ istrative structures to satisfy their regulatory require- the actors have been identified it is important to assess ments. It should not be a surprise to find the large diversi- their influence (power relationships), credibility and legiti- ties manifest between nations in their respective cultural, macy (or lack thereof), and interests—specifically, how they social, economic, and political spaces extends to and has stand to gain or lose from any proposed changes. In paral- implications for the design, development, and operation of lel with the launch of an active marketing campaign for spe- trade facilitation. Indeed what is perhaps more surprising cific reforms by the “champion(s) of change” it is necessary is a belief that “one size fits all.” to continue research and analysis to accumulate evidence Despite the recognized diversity there is a global that will develop and deepen the rationale for broaden- consen­ sus on the benefits of the key principles of trade ing the coalition for reform. The timing and sequencing of facilitation as evidences by the WTO Agreement on Trade activities will be critical to the success or setbacks to the Facilitation and its inclusion in all the regional economic reform process. agreements. A recent report by UNECA considers there The World Bank PEA approach is premised on arriv- is a ‘’consensus in the empirical literature, regardless of ing at long-term positive sum games and should not be the methodology utilized, on the positive and significant confused with a short-term zero-sum struggle that reflects impact trade facilitation could have for Africa’s trade entrenched interests. Successful reform will be a “win- performance.’’ The potential for Africa to benefit dis- win” outcome and the approach needs to ensure that is proportionately from reducing trade costs follows from communicated at all stages of the process. Attempts to the region experiencing higher costs relative to other shortcut and telescope the reform process to fit into ICP regions. targets or self-serving domestic targets, or ambitious REC Given the global consensus over the importance of objectives will not be successful. Specific targets and dead- trade facilitation there is widespread recognition that effec- lines are best devel­ oped through stakeholder consensus tive implementation remains the key challenge. In this vein with the champion of change taking the lead. Analysis and the UNECA report also encapsulates the consensus within action cannot be rigidly separated and differences in per- developing countries and among large sections of the ception are key influences on policy outcomes. broader international community in placing the emphasis Identifying the institutional arrangements underpin- on the investment and cost requirements and the neces- ning trade facilitation and assessing their efficiency against sity of providing technical and financial assistance. 110 Political economy of regional integration in sub-saharan africa inter­national best practices requires a mapping exercise. facilitation. For each of the specific groups involved it is It is necessary to understand the motives and rational for important to try and understand their motivations and each of the participants involved. Why are the existing ently, identifying the incentives for priorities or, put differ­ policies and institutions not being reformed? What are the supporting the proposed reforms relative to the existing incentives of the different stakeholders? Who would win situation. Understanding the inter-relationships within and and who would potentially lose (in the short-term) from between broad groups of stakeholders and their scope reducing trade costs? Are there lessons from countries that to influence events is required. Assessing the influence of have implemented substantive trade facilitation reforms different stakeholders and their ability to mobilize human and established a modern national quality infrastructure? and financial resources in support of their commitment to The trade facilitation environment is characterized by either promote or stymie reforms is critical for determining competition, complexity, and conflict. The interests of the specific intervention strategies. principal clusters of stakeholders may conflict should they Domestically trade facilitation concerns government have competing goals. There may be competing policy pri­ politicians, public sector officials, and a diverse range of orities within government and between different segments firms and individuals from the private sector. Within the of the private sector, such as large international compa- specific groups of Actors the lead government agency and nies, import competing firms, small- and medium-scale major private sector firms or private sector organizations distrib­utors. Most stakeholders or actors involved in the may be expected to be the “drivers of change.” In both supply chain understand the elements in which they are these cases trade facilitation represents their core busi- directly involved (immediate backward and forward link- ness or activity from which they earn their income. While ages) but have limited appreciation of the whole supply all of the other clusters or groups have an interest in chain. Operating businesses understand existing trade advancing trade facil­itation it is only one among an array of facilitation procedures and regulations and know how to interests. Support and commitment for reform from these work with them. Similarly government officials understand broad clusters is important but must be considered a the negative and positive aspects of existing trade facilita- complement to the lead agency or drivers of change. Such tion procedures. There may be strong support from vested broad support from ICP or the Political Institutions while interests to maintain the status quo in order to retain necessary, it is not sufficient and cannot serve as a substi- ongoing rents. tute for a lack of commitment by the “natural” lead agency. The wide range of actors/stakeholders involved in Once the “driver of change” and the “roadblocks” have trade facilitation is shown in Table 11 below. Five major been identified it is important to map out a convincing clusters of actors are involved in various elements of trade argument for change taking into account specific con- flicts and competing interests. The leadership of the lead TABLE 11: Actors Involved in Trade Facilitation agency responsible for implementing trade facilitation is required to build a convincing argument for the change as Cluster of Actors Specific Groups of Actors they will need to win over both their own staff and many International Institutions WTO, WCO, World Bank, users within the private and public sectors. COMESA/ EAC, International The recent World Bank handbook on Border Manage­ Cooperating Partners ment Modernization, McLinden, Fanta, Widdowson, and Political Institutions Heads of State/Minister of Doyle (2011) discusses the importance of building a con- Finance, Parliament vincing business case for border management reform. This Core Public Agencies Minister of Trade/Agriculture, approach was further extended by Hoekman and Jackson Senior and Junior officials involved with administration (2013) who highlighted the importance of the different of trade regulations, National players along a supply chain as key enablers in stimulat- Standards Bodies ing further trade reform. Both these interventions recog- Private Sector Operators Importers & Exporters, customs nize that implementing effective trade facilitation reforms clearing agents, transport companies, freight forwarders, requires much more than a straightfor­ ward technical com- testing and certification mitment to apply “best practice” proce­ dures. It recognizes companies that any existing institution/regulatory framework will Compliance and Judiciary, anti-corruption operate in a way which creates incentives and disincen- Enforcement groups, Parliamentary oversight tives for each of existing stakeholders. Chapter 5: The Political Economy of Trade Facilitation in Eastern and Southern Africa 111 4. Case Studies of Trade assessments of needs and priorities were conducted by the recipient country which was also responsible for draft- Facilitation ing the final report. The final report remains the property The EAC countries have committed to an active regional of the recipient country and is only made public with their agenda for trade facilitation through both the EAC and permission. The WTO estimated that the needs assess- COMESA. Under the auspices of the WTO and the WCO ment workshop will take five working days and stated that several countries have undertaken comprehensive Trade it should be conducted by national trade facilitation task Facilitation Assessments. As part of the Aid for Trade force comprising all the relevant border agencies, private agenda the EIF has also financed several Diagnostic Trade sector, and other government agencies that would be Integration Studies in the region to identify the key tech- affected by the new WTO trade facilitation agreement. The nical constraints to implementing WTO commitments and national workshops are considered to be primarily techni- increasing regional and international trade. Notwithstand- cal with the potential for input in an advisory or consulting ing these and other initiatives progress on trade facilitation capacity from international institutions (WCO, WTO, World has proven to be slow. Bank etc.). Political institutions, identified in Table 11 as What can be learned from the experience of trade one of the major cluster of actors determining the nature facilitation in Eastern and Southern Africa over the past and pace of trade facilitation are not mentioned as partici- decade? How should one approach a PEA given the dearth pants in the national workshop. of published reports? A preliminary answer to this ques- The Trade Facilitation National Needs Assessment is tion may involve focusing in more depth on specific trade designed to address technical shortcomings. Indeed the facili­ tation commitments and asking the following funda- implicit assumption is that there is an inadequate under­ mental question. If the recommendation is so important standing of the proposed measures (such as expedited and has high level political commitment why has progress clearance, risk assessment, simplification of formalities, been so challenging? and documentation requirements) and what is required is At the outset it is important to obtain an accurate to “explain the proposed measures and help participants estimate of the changing trade facilitation environment understand what they would need to do to implement in the region by documenting progress and setbacks. In each measure.” While technical shortcomings and the lack the absence of detailed case studies much of the evidence of resources may represent a partial explanation for the focuses on investments in infrastructure and the intro- current state of play it leaves many unanswered questions. duction of com­ puterization. Information on more objec- For example, it cannot account for the current state of play tive indicators such as number of physical inspections, in many countries. time-release, customs valuations are rarely made publicly The Revised Kyoto Convention (RKC) adopted by the available and tend to be one of assessments rather than WCO Council in 1999, entered into force in February information collected on a routine basis over time. 2006. The RKC represents a blueprint for modernized The negotiations leading up to the recently approved customs procedures and may be considered a precursor WTO Agreement on Trade Facilitation raised the profile to the principles embodied in the WTO Agreement. This of trade facilitation and encouraged the completion of comple­ mentarity is illustrated in Table 12 and serves to compre­ hensive national level Trade Facilitation Needs highlight the length of time that many of the trade facilita- Assessments. The commitment to negotiate an Agreement tion tools have been under consideration. Within the EAC on Trade Facil­ itation at the WTO began formally in 2004 Kenya, Uganda, and Rwanda are signatories to the RKC. with a focus on “clarifying and improving relevant aspects Furthermore, the agreements at the multilateral level are of Article V, VIII and X of GATT 1994.” The Trade Facilita- complementary with regional agreements within the EAC tion Needs Assessment represented an integral part of and COMESA. Given the extensive trade facilitation discus- the process and sought to empower developing and least sions by customs and trade officials in multiple fora over developed countries to identify their trade facilitation the past decade, and ongoing technical assistance projects needs and priorities and to identify the cost implications of at the national and regional levels in Eastern and South- the proposed measures. ern Africa accounting for the implementation delays and in All of the assessments were undertaken using a some case the non-imple­ mentation by recourse to a lack standard­ ized guide (which was an official WTO document of detailed understanding of the technical issues leaves based on the evolving Consolidated Negotiating Text). The much unexplained. 112 Political economy of regional integration in sub-saharan africa TABLE 12: Examples of Complementarity between WCO Revised Kyoto Convention and WTO Trade Facilitation Agreement Principles WCO Revised Kyoto Convention and WTO Trade Facilitation Agreement Transparency and Predictability Yes, General Annex, Chapter 1, 7, and 9 Articles 1 and 2 Procedural Simplification and Streamlining Yes, General Annex, Chapter 3, 7, and 9 Articles 3 and 10 of documentation Coordinated Intervention with other Border Yes, General Annex, Chapter 3 (also SAFE) Article 8 Agencies Source: Adapted from the WTO Trade Facilitation Toolkit, List of Articles in Section 1 of the WTO Agreement on Trade Facilitation—Referenced to WCO Instruments and Tools, February 2014. The trade facilitation agenda is inherently political with 4.1 Trade Facilitation in the East African many interested parties including senior politicians, exist- Community ing businesses, and a wide range of actors who undoubt- Trade facilitation in East and Southern Africa is heav- edly understand the specific technical issues. The actors enced by recent global developments as all the ily influ­ currently engaged in cross border trade are familiar with members of SADC and the EAC are members of both the the existing procedures and know how to operate and WTO and the WCO as are a large majority of the mem- trade profitably. Engaging in major procedural change is bers of COMESA. Further commitments under the regional aimed at reducing trade costs; however, it will also shift the economic group­ ings include trade facilitation. A review costs and benefits to both existing and potential traders. of regional trade and transport facilitation instruments Focusing solely on the technical aspects of trade facilita- in the EAC (Kitenga and Nyangweso 2010) and the 2012 tion takes attention away from those actors who may feel Report by the USITC reported on the progress and chal- threatened by the proposed changes, such as small cus- lenges. The World Bank Logistics Performance Index (LPI) tom brokers and clearing agents, customs officials at the and the Trading across Borders Doing Business Indicators border, and politicians who can confer patronage through provide an indication of the performance of the five EAC approving exemptions. members relative to all other countries. During the period Initially the slow progress was ascribed to “capacity 2009–2011 the Doing Business reports noted no reforms constraints” which resulted in donors funding trade capac­ relating to the Trading across Borders indicator. Relative ity building activities to support trade facilitation. A narrow to sub-Saharan Africa the EAC members are performing focus on capacity constraints has resulted in the national close to the continent wide average, indicators in 2014. reform process, and the role of vested interests being The LPI index which has a more detailed breakdown largely excluded from detailed analysis. Slow progress on of developments in trade facilitation shows Kenya and implementing Ministerial commitments at regional fora is Rwanda improving relative to all other countries over the invariably ascribed to a “lack of technical capacity.” How- period 2007–2014. Unfortunately the LPI only includes ever, there is growing evidence that a specific constitu- data from Uganda for one year (2010). The ranking on ency, such as financial institutions, clearing and forwarding the LPI and the Trading across Borders performance for agents, import competing private companies, and para- the EAC are shown in Table 13. The recently released EAC statal entities may be benefiting from the existing policy Scorecard provides a useful tracking of de jure compli- and regulatory framework and may actively oppose any ance by EAC Partner States with their commitments to change. implement the Common Market Protocol. The scorecard Untangling the web of influence within the political deci­ examines compliance with eliminating tariffs and equiva- sion making process is rarely obvious or straightforward. lent measures on intraregional trade, elimination of non- Furthermore, the balance of incentives often favor non- tariff barriers, implementing the common external tariffs, implementation as few regional agreements have penal- and harmonization and mutual recognition of sanitary and ties for delayed implementation and effective monitoring phytosanitary standards and technical standards. and compliance mechanisms are still in their infancy. Chapter 5: The Political Economy of Trade Facilitation in Eastern and Southern Africa 113 TABLE 13: Rankings on Logistics Performance Index, 2007–2014 and Doing Business Indicators for 2014 Documents Documents Days to Days to Country 2007 2010 2012 2014 to Import to Export Import Export Logistics Performance Index Doing Business Trading Across Borders 2014 Burundi 113 n.a. 155 107 10 9 32 46 Kenya 122 76 99 74 9 8 26 26 Rwanda 148 151 139 80 9 7 30 26 Tanzania 137 95 88 138 11 7 31 18 Uganda n.a. 66 n.a. n.a. 10 7 33 30 Note: n.a. not available Ranking out of 143 countries in 2014 Source: LPI, 2007–2014 and Doing Business, 2014 Despite considerable improvements in individual coun­ movement of goods and people while also more effectively tries in SSA the majority of African economies, including identify the illegal trade is essential for economic growth Eastern and Southern Africa continues to lag on all the and stability. international measures of trade facilitation. This challenge has served to raise the profile of trade facilitation to the highest level. Although challenges remain as the linkages between trade facilitation and the general 4.2 Mapping the Actors: Interests, competitiveness of the economy are not always sufficiently Motivations, Incentives, and Pressures attributable or direct enough for a positive pay-off. Recent Trade facilitation encompasses a wide range of profes- work raising awareness of these linkages and highlight- sional activity areas and stakeholders (see text box). The ing the direct costs of foregone investment has encour- wide range of institutional actors with an interest in vari- aged higher level political involvement in trade facilitation ous elements of trade facilitation ensures that introducing initiatives. For example, in May 2014 the Presidents from fundamental changes will be challenging and complex to Kenya, Rwanda, and Uganda, the second Vice President of manage. Over the past two decades the global economy Burundi, and the Prime Minister of Tanzania all attended has been transformed with the rise of global value chains, the official launch of the Kenya National Electronic Single increased concern over cross-border trade in illegal prod- Window System. At the launch President Kagame stated: ucts as suppliers seek out “weak links” and increased security concerns following the 9/11 attacks. These devel- “I just want to reiterate how this is one of many opments have created new chal­ lenges for all the agencies import­ ant projects that the EAC Partner States involved in the management and control of cross-border have undertaken to deepen integration that we movements. have been seeking, make business more efficient, On the one hand the increase in trade transactions and lower the cost of doing business as we move and value, along with the reduction in transit time and the forward.” importance of increased reliability has placed a premium on enhancing trade facilitation as a key factor in competi­ This high level commitment at the level of Regional tiveness. Concern over illegal cross-border movements Heads of State, while positive for advancing trade facilita- and the spread of violent conflict into neighboring coun- tion needs to be weighed against competing objectives tries (for example Sudan-South Sudan, Nigeria, Kenya- which may be more prominent at the national level. These Somalia, DRC) has exerted pressure for increased controls may include fighting smuggling, tackling general corruption, and checks. All of these developments have served to retaining the support of the domestic import substituting raise the profile of the border control agencies. Ensuring firms who complain about unfair competition and under- more efficient border controls to facilitate the legitimate valued imports, and the need to raise domestic revenue 114 Political economy of regional integration in sub-saharan africa BOX 3: Key Activity Areas in Trade MULTIPLE MANDATES AND INTERESTS Facilitation Revenue Collection Transport Infrastructure Safety and Security (dangerous goods, illegal goods) Transport Equipment Environment and Health (quarantine) Hub Development (Free Zones, Logistics and Distri­ Consumer Protection (product testing) bution, Inland Clearance, Container Repositioning) Trade Policy (anti-dumping) Integrated Transport Planning Trade and transport regulation Customs transparency Modern customs practices from border taxation. Notwithstanding these challenges Customs clearance facilities there is growing evidence that in some selected high Inefficient public logistics services profile activities the EAC has made significant progress, Complex Tariffs and NTBs for example border clearance times at Malaba crossing Inter-ministerial/Interagency coop (between Kenya and Uganda) are now measured in hours Cross border movements rather than days. The cumulative impact of high level politi- Transit regimes cal commitment, long-term donor funding for technical Foreign Exchange restrictions assistance and infrastructure improvements, and increas- Trade Finance ing commercial pressure from both sides of the border all Trade promotion and market information played a role in reducing transit times. Information systems The political leadership within the EAC Partner States Quality and regulation of Logistics (as in most countries) retains the power to appoint key Sector Consolidation (transport and logistics staff within government and the public sector. Under- companies) standing the motivation and interests of key appointees Supply Chain integration in the revenue agencies and other agencies and depart- Foreign participation in logistics services ments responsible for trade facilitation is important for Trade Facilitation and Security determining implemen­ tation of the reform agenda. Technical Regulations and Quality Assurance Many National Revenue Administrations are driven by the need to maximize revenue generation. The commit- Key Actors ment to facilitate trade is frequently a secondary objective Importer/Exporter even if publicly stated in their mandate. In many countries Forwarder career development and bonus payments are linked to the Integrator revenue agency meeting a specific revenue target. Import Customs Broker duty col­lected by national revenue administrations contin- Transport Operator ues to be an important element of total domestic revenue Container Terminal accounting for 9 to 15 percent of the total. Further these Zone Operator revenue agencies also collect value added or sales taxes Warehouse on imports and man­ age all the export declarations that Bonded Facility provide the evidence for duty and VAT rebates on inputs Financial Institution which serves to magnify the importance of revenue collec- Value added logistics tion. The box below illustrates the multiple mandates and Testing and Certification interests that exist within the agencies with responsibility for customs clearance. Understanding the probability of trade facilitation reform requires the proponents to understand the set of interests, motivations, and priorities, incentives, and pressures that operate on staff throughout the revenue agency. While identifying the publicly stated goals repre- sents the starting point it is essential to go beyond that Chapter 5: The Political Economy of Trade Facilitation in Eastern and Southern Africa 115 and identify the inter­ ests, concerns, and motivations of dif- presents an example from Madagascar showing how many ferent groups within a specific institution. The interests of of the stakeholders were opposed to change. The focus the senior management team all appointed on fixed term then shifts to outlining the staged approach to develop- contracts may not be identical to the career customs offi- ing a NSW which focuses on the process. Virtually all the cers at specific border posts. Different sets of actors within reports on implementing the NSW focus on the technical an institution, for example, senior management and front- process with a reference to ensuring dialogue, however, line staff may face quite different incentives. There may be there is a dearth of reports outlining the specific activities group pressure to reform from top management yet at that contributed to developing the coalition to support the frontline there may be resistance because the reforms implementation, and there are even fewer case studies would reduce informal payments. A bonus system based documenting why NSW have failed or taken much longer on revenue collected may encourage both a higher level than were originally scheduled. of physical inspection and undervaluation by firms as they The remainder of this section begins to sketch a more anticipate their valuations will always be subject to uplift. At detailed outline of the experience in Eastern and Southern the border (frontline) there may be pressure on a new cus- Africa of implementing the Regional Customs Bond Guar­ toms officer to participate in higher inspection levels and antee, Border Management Cooperation, and more tenta­ other practices which increase the costs of trade as this tively the development of regional cooperation in quality will increase the revenue collected. A new recruit may face infrastructure and addressing technical barriers to trade. repercussions from colleagues from refusing to engage in illegal clearance practices. Understand­ ing the specific cir- 4.3 Regional Customs Bond Guarantee cumstances of the officials responsible for implementing customs and border clearances is a necessary element of For the past three decades the commitment to implement mapping a reform program. a Regional Customs Bond Guarantee (RCBG) scheme has Among private sector operators it is necessary to dis­ been on the trade agenda in Southern Africa. Indeed the tinguish between those that benefit from the status quo regional bond guarantee scheme was on the Preferen- and those that have the most to gain from improved trade tial Trade Area (PTA) agenda at the Ministerial Meeting facilitation. It may be that the organized private sector in Lusaka in December 1985—this predates the estab- has negotiated an informal fast track for their products lishment of COMESA. The COMESA Heads of State and while medium- and small-scale firms face longer delays Government signed the Regional Customs Bond Guar- and increased uncertainty. Table 14 seeks to map out the antee Agreement in 1990, however, implementation was dominant incentives facing major stakeholders for a range deferred until all the modalities and the legal and technical of trade facilitation initiatives. instruments were agreed. Further the Agreement had to There is a dearth of detailed political economy analy- be formally ratified by nine states for it to enter into effect. ses of specific trade facilitation incentives. Surveys of After protracted nego­ tiations COMESA finalized their pro- major reforms generally focus on the technical issues visions for the RCBG in 2005 and seven countries had rati- encountered and highlight how approaches have evolved fied. Zambia had delayed ratification stating the need to over time. A good example of this approach is the recent assess and quantify the impact on business taking into paper by Jonathan Tsen (2011), “Ten Years of Single Win- account concerns raised by some private sector groups on dow Implementation: Lessons Learned for the Future.” possible job losses. This examines how the concept of the Single Window has In Zambia freight forwarders and clearing agents must evolved along with a summary of implementation and a be licensed by the revenue authority to carry out transit review of how information technology developments will related services. In 2005 Zambia had licensed 196 Cus- accelerate the move away from paper-based exchanges. toms clearing agents and approximately 30 percent dealt The paper implicitly refers to political economy con- with Removal in Bond or Removal in Transit. Transit traf- straints by highlighting how the concept of the NSW chal- fic between South Africa and the DRC through Zambia lenges the traditional compartmentalized approach to remains a profitable business for the clearing agents. This regulatory control of the movement of goods. Indeed the tends to be the larger agents who are comfortable absorb- author notes that “the challenge of coordinating all the ing the risk of default. Since the trade is unbalanced with different agencies (and their procedural and data require- few goods being exported in transit from the DRC to South ments) into coherent and simplified procedures that could Africa the Zambian clearing agents stand to lose the tran- be automated is often more political than technical’’ and sit business when the RCBG is implemented. Unlike their 116 Political economy of regional integration in sub-saharan africa TABLE 14: Mapping of Incentives of Key Public Agency Actors in Trade Facilitation Authorized Integrated Economic Core Public Border Use of Risk Increased Operator Agencies Main Priority Single Window Management Assessment Transparency Scheme Ministry Increase Positive, limited Positive, limited Support, limited Supports as Positive, limited of Trade, exports, role role role increases role Registration & promote SMEs compliance with Licensing WTO Ministry of Ensure food Positive likely Reluctant Support, limited Supports as in Limited role Agriculture security to insist on to delegate role compliance with retaining authority for WTO power to issue issuing import import permits permits for sensitive products Revenue Meet Revenue Very Positive— Positive as Yes, in principle Yes, in principle Yes, in principle Authority/ targets SW usually led Revenue/ but in practice but has not but concerns Customs by Revenue/ Customs usually slow as believe been a priority over setting up Senior Customs the lead agency it will reduce and staffing Management revenue Post Clearance Audit Units Revenue Deliver revenue Reduces Generally Reluctant to Yes, in principle Need convincing Authority/ targets discretion, positive as implement- but still need by Senior Customs Line linked to perceived removes to change the Management as Officials introducing to increase discretion, culture to one a major change electronic authority of threat of less of Open Access of culture for data, concern the Revenue/ control and to information officials used over changing Customs Agency power for all to a high rate practices of physical and potential inspection reduction in jobs SPS Officials Minimize Will insist on Will insist on May resist using Yes, in principle Need to ensure outbreaks of retaining their retaining their risk assessment in conformity this is linked food poisoning/ authority to authority to and recognition with the WTO with recognition generate test regulated test regulated if revenue is a Agreement of foreign/ funding products products concern regional test results Standards Promote Quality Will insist on Will insist on May resist Yes, in principle Need to ensure and Technical policy, ensure retaining their retaining their accepting in conformity this is linked Regulations adequate authority to authority to foreign tests with the WTO with recognition (TBT) funding for test regulated test regulated if revenue a Agreement of foreign/ National products products concern regional test Standards Body results Road Transport Maintain and Likely to insist Expected Will require Senior Officials Considers this a Officials expand physical on maintaining to insist on training support, but customs issue road network, their mandate maintaining not a priority promote road to weigh/check their mandate in allocating safety vehicles to weigh/check resources vehicles Security/Police Minimize trade Will retain Will retain Sees this as a Requires a Considers this a in prohibited authority to authority to customs issue change of customs issue goods search search culture Chapter 5: The Political Economy of Trade Facilitation in Eastern and Southern Africa 117 counterparts in South Africa the Zambia clearing agents 4.4 Border Management Cooperation have structured their prices so that a disproportionate The border agencies are responsible for the smooth pro­ amount of the change relates to the transit bond. An ear- cessing of people and goods at the points of entry and lier report (2005) estimated that up to 500 jobs could be exit in accordance with domestic regulations. Efficient at risk, on the assumption that growth in exports was not border management requires a number of agencies to matched by the reduction in the costs of transit trade. The work together in a coordinated manner. Coordination number of import declarations is three times the number is required between the two countries (cross-border), of export declarations. between the different agencies with mandates at the bor- COMESA carried out pilot operations of their Transit der, and within the agency between the border post and Management System (TMS) over the period 2007–2010 the Head Office. Efficient communication is essential for on the Northern Corridor covering Kenya, Uganda, and ensuring the smooth flow of goods and people while also Rwanda. The trial was very small with approximately 251 ensuring public safety and security. transit runs (out of this 240 were related to imports). A review of the Mwanza, Malawi border post in 2011 by Approximately 900 declarations per day (in February 2010) the Southern Africa Trade Hub found serious challenges were transmitted from Mombasa port through the Malaba relating to inter-agency cooperation. When interviewed border post. COMESA launched their scheme in March the challenges listed by the different government agen­ 2010 although this was suspended because a number of cies, including the Malawi Revenue Authority, Ministry of revenue authorities had not put in place the necessary Health, Immigration, Malawi Bureau of Standards, Forestry, regulatory reforms to transform the pilot test activities into Plant Health, and Road Traffic Directorate focused largely routine operations. The scheme was re-launched along on infrastructure shortfalls. These included a shortage of the Northern Corridor countries of Kenya, Uganda, and computers, lack of examination tools such as forklifts and Rwanda in 2012 and by February 2014 almost 200 guar- scanners, frequent power outages. Government officials antees totaling $89 million had been executed by Clearing also complained about routine under-invoicing by trad- and Forwarding Agents. The Uganda and Rwanda Revenue ers and incomplete knowledge of trade regulations by the Authorities—both landlocked countries were the main Customs Clearing and Forwarding Agents. Private sector drivers for change. They took the initiative and pushed to complaints included duplicate tests which wasted time, replace the National Bond with a Regional Bond. too many agencies at the border, long delays between tak- The earlier pilot (or trial runs) organized by COMESA in ing a sample and the publication of test results. 2007–2010 were characterized by a lack of awareness by The 2011 assessment found limited coordination field staff at the border posts. This is despite the long build among the agencies at the border resulting in duplica- up to the pilot with numerous regional meetings organized tion of inspec­tions, or goods being released without being by the Secretariat and the item remaining on the agenda attended to by all the required agencies. In spite of most of both the Officials and the Ministers of Trade meetings. of the agencies at the border requiring access to the same During the discussions between the officials numerous information no data sharing took place. In 2013 the DTIS technical details were raised which required the matter Update team vis­ ited the Mwanza border post and found to be deferred while Member States carried out their own little change from the situation two years earlier in terms analysis. Once the officials returned back to their capitals of duplicate testing, the absence of data sharing, and a lack there was no sense of urgency to undertake the consul- of coordination on operating hours. tations and carry out the research. On several occasions Each agency at the border operates in accordance with donors were requested to fund technical work to advance its own policy and procedures (this was also confirmed to the Regional Bond Guarantee system. The failure of mem- be the case in recent review of Zimbabwe) which means ber states to prioritize the RCGB, along with in at least one that each of the staff members have their own incentives country (Zambia) active resistance to change by customs that would not appear to be coordinated to deliver effi- clearing agents, assists in accounting for the delay of sev- cient trade facilitation. Establishing Joint Border Commit- enteen years between the approval by the Heads of State tees and/or ensuring regular meetings at the border of all and the launching of a pilot in 2007. 118 Political economy of regional integration in sub-saharan africa the stakehold­ers have been proposed. The dialogue of the and licensing within the same country. A recent Breakfast stakeholders at the border is useful in highlighting chal- Meeting con­ vened by the East African Business Council in lenges and in many cases agreeing on practical compro- Arusha (May 13, 2014) highlighted the obstacles to trade mises, however, the major constraints require regulatory resulting from Non-Tariff Barriers. changes that must be recommended and approved by the Following the approval of the EAC SQMT Act in 2006 Head Offices/Minister and then notified through the legis- Part­ner States and the EAC Secretariat were required to lative process. establish three new administrative structures to address QI issues at the regional level: the East African Standards Committee (EASC), the Liaison Office (to provide adminis- 4.5 Quality Infrastructure and Technical trative support to the EASC), and the East African Accredi- Barriers to Trade tation Board (EEAB). Prior to the SQMT Act the EAC Partner Increased living standards and a growing demand for States had established (in 2004) a number of technical sub- safe, reliable, and environmentally friendly products have committees. These included standards, quality assurance, resulted in a large increase in the number of technical reg- metrology (further divided into legal and scientific and ulations and standards adopted by both developed and industrial), and testing. After 2006 these sub-committees developing countries. Balancing the pursuit of legitimate continued and reported to the EASC. Subsequently a fur- public policy objectives with a commitment to more open ther sub-committee focusing on Technical Regulations and trade lies at the heart of the both the multilateral level WTO Cross Cutting Matters (CCM) has been established. Draft TBT Agreement (1994) and at the regional level the EAC regulations to “operationalize the EAC SQMT Act” were Standards, Quality Assurance, Metrology and Testing Act submitted to the 15th Meeting of the EASC in June 2011. (SQMT)(2006). Both agreements seek to ensure that pub- At the same round of meeting Offi­ cials considered “Proce- lic safety, health, and security are implemented in a non- dures for the Development of East African Standards.” discriminatory manner that minimizes the impact on trade. The EAC Regional Quality Infrastructure and the Part- Notwithstanding these commitments all five EAC Partner ner States Quality Infrastructure has received financial and States continue to expe­ rience challenges in implementa- tech­nical assistance from a wide range of donors over the tion and in ensuring that mandatory standards (technical past decade. In a partnership between the EAC Secretariat regulations) do not function as technical barriers to trade. and German development cooperation the Physikalisch- The evidence in the EAC is consistent with many other Tech­ nische Bundersanstalt PTB (from Germany) supported developing countries Regional Economic Communi- the establishment of a Regional Quality Infrastructure over ties. Namely as traditional tariffs have been removed or the period 2004–2013. The first phase through to 2007 reduced technical and regulatory barriers to trade have focused on establishing the legal framework and on capac- risen in prom­ inence. Technical barriers to trade figure ity develop­ ment for the EAC Secretariat and its Technical prominently in the surveys of formal Non-Tariff Barrier Committees. The second phase focused on implementa- complaints by Partner States. The recently published EAC tion with a special emphasis on mutual recognition of con- Scorecard (2014), the Annual Report on Status of Elimi- formity assessment procedures (ensuring EAC countries nation of Non-Tariff Barriers in the EAC (2013) highlight used the same testing procedures), strengthening of met- the continuing importance of technical barriers to trade. rological and testing services, and increased participation Despite a long history within the EAC of committing to of the private sector in standard setting. The final phase eliminate NTBs through harmonizing standards, progress from 2011–2012, provided support to the EAC Secretariat has been slow and labored. Recom­ mendations to agree to and national QI institutions to support implementation of mutual recognition of quality marks within the EAC predate the SQMT Act. the existing SQMT Act. The PTB project listed a number of key problems In 2012 the Secretary General of the EAC blogged on encoun­ tered during project implementation in a Case the Ministerial Meeting dedicated to “getting rid of NTBs.” Story report for a major A4T conference in 2011. The prob- One year later, in July 2013, the East African Business lems included a lack of coherence between national devel- Council organized a dialogue between trade facilitation opment priorities and EAC integration principles. Partner practitioners in Dar es Salaam which served to highlight the Countries delayed implementing the SQMT Act and in absence of coordination within Tanzania between the Tan- some cases “rejected” implementation. The EAC Secretar- zania Food and Drug Agency and the Tanzania Bureau of iat has no mechanism for applying sanctions. Further the Standards which resulted in multiple testing, certification, EAC Secretariat lacks the technical capacity to coordinate Chapter 5: The Political Economy of Trade Facilitation in Eastern and Southern Africa 119 and support effective imple­ mentation of the SQMT Act. came from very large companies with significant cross bor- At the highest political level the Presidents and Ministers der trade—Procter and Gamble, Nestle and East African have reaffirmed their commitment however within each Breweries and the Kenya Association of Manufacturers. country lobbying by specific industries has served to delay Only one person from the EAC Secretariat worked spe- implementation. The project also sup­ ported the establish- cifically on RQI the others were responsible for trade and ment of a comprehensive website on EAC SQMT (www.eac- industry and administrative support. quality.net). The national quality infrastructure systems in the Other donor projects have supported the establish- founder members of the EAC are relatively well established ment of harmonized standards for agricultural and horti- institutions. Reforming the national regulations toward a cultural commodities (USAID-COMPETE), strengthening the harmonized WTO compatible system is proving challeng- role of the private sector through establishing the Regional ing. Several EAC countries have established a large num- Private Sector Standards Platform within the EABC (Trade- ber of compulsory standards (technical regulations) and mark East Africa), Trade Capacity Building in Agro-industry receive considerable revenue from mandatory testing. products for establishment and proof of compliance with The 2008–2009 Annual Report for the Uganda National international market requirements (NORAD, implemented Bureau of Standards noted how the standard bureaus in by UNIDO), Trade Promotion through environmental stan- both Kenya and Tanzania were able to raise more than 80 dards for the EAC region (Swedish Standards Institute). percent of their total budget from testing and other fees The projects with a regional dimension all supported and made a recommendation that UNBS be permitted to regional meetings and dialogue. A number of the donors introduce similar schemes “from which revenue genera- provided testing and technical equipment for public sec- tion grows with the economy so as to be able to provide tor laboratories. The proliferation of committees and sub- effective support services to the country.” The report went com­ mittees has resulted in a large increase in the number on to recommend introducing schemes such as an indus- of regional meetings. Many of these meetings are exter- trial levy, a pre-export Verification of Conformity (PVoC), nally financed. Table 15 below shows the participation in and an import inspection levy. the 2011 East African Standard Committee Meeting in Aru- Establishing a universal industrial levy effectively ipation is dominated by the respective National sha. Partic­ imposes a tax on all domestic producers to cover the costs Standards Bodies with virtually no involvement from the of the national quality infrastructure. Similarly requiring all parent Minis­ tries of Trade. Indeed only one participant imports to be subject to an inspection levy will increase was attached to a Ministry of Trade the other government trade costs. The various levies and inspection fees have delegates were from the Ministry of East African Affairs. been driven by the National Standards Bodies as they seek Rwanda and Burundi had no representatives from the pri- to reduce their dependence on government funding and vate sector. The private sector representatives from Kenya provide increased services. At the national and regional TABLE 15: Participation on the East African Standards Committee Meeting June 2011 National Weights and Food & Drug Government Private Other/ Country/Agency Standards Body Measures Agency Ministry Sector Technical Total Burundi 6 1 7 Kenya 8 2 5 1 16 Rwanda 2 2 Tanzania 6 2 3 1 3 15 Uganda 10 2 1 1 14 EAC Secretariat 4 4 EABC 2 2 COMESA 1 1 Donors/Projects 5 5 Total 32 4 3 3 10 14 66 Source: Derived from Report EAC/TF/46/2011 (available on line) 120 Political economy of regional integration in sub-saharan africa level attention has identified inadequate laboratory test- each Partner State seeking to try and preserve as much of ing equipment/facilities, lack of quality awareness, staffing its own NQI as possible. shortages, and funding shortfalls as government budgets Although the SQMT Act allows for mutual recognition are strained as the major constraints to developing an effi- of technical requirements across all Partner States, there cient national/regional quality infrastructure. Considerably has been limited take up with each partner preferring to less attention has been accorded to the regulatory frame- negotiate harmonized standards. Why have the Govern- work. Frequently the regu­ latory framework is treated as a ment Officials who were the primary architects of the given, although recent work by the OECD, the World Bank, EAC SQMT strategy shown a strong preference for the and others on regulatory best practices and the WTO time-consuming harmonization approach when experi- Accession process have served to highlight how NQI can ence from the European Union might urge caution. Who be trade restrictive. is driving the RQI agenda? Is it trade officials, technical Examples include duplicate testing, the failure to accept standards officials, private labora­ tories, international testing/accredited results from trade partners, excessive firms, ICPs? All these stakeholders have an interest in the reliance on mandatory standards, and specific national NQI and the RQI. Table 16 on the following page presents stan­ dards. These continue to be recorded as major Non- a preliminary illustrative mapping of the incentives fac- Tariff Barriers and have been targeted for removal at the ing the major stakeholders in the NQI. What are their regional level. Progress on implementing a Regional Qual- interests and main priorities? Do they have the power to ity Infrastruc­ ture in the EAC is proceeding slowly as each influence specific outcomes? Is it possible to identify the Partner State seeks to retain its own technical regulations incentives facing particular stakeholders, do the incen- and negotiate to a harmonized standard. Effectively the tives vary within institutions? Which stakeholders deter- RQI has been superimposed onto all five existing NQI with mine the outcome? Chapter 5: The Political Economy of Trade Facilitation in Eastern and Southern Africa 121 TABLE 16: Illustrative Mapping of Incentives of Key Actors in the National Quality Infrastructure Actors/ Status and Stakeholders Functions Main Priority Power to Influence Incentives Harmonization National Responsible for Mandate states Powerful as parent Promote testing Extremely time Standards Body setting technical public safety and Ministry is often to raise fees, consuming— regulations, testing, promoting quality technically weak. increase the requires numerous metrology, and but frequently number of technical meetings by mid— accreditation prioritize activities regulations to level officials. that raise revenue increase influence Ministry Promote trade, Prevent sub- Often technically Reduce dependence MTI officials may of Trade preserve existing standard imports weak on Standards of NQI on attend frequent import competing counterfeits, and Issues government meetings. Creates industries support domestic revenue opportunities for industry non-wage income enhancement Ministry of Ensure food Protect small High—as agriculture Controls over Extremely time- Agriculture security and food holders from is source of licensing consuming safety imports livelihood for agricultural inputs requiring numerous majority determines meetings investment in agriculture Ministry Food safety, poison Promote Public High Controls over drug Extremely time- of Health control Health—improve licensing provides consuming laboratories opportunities for investment Accreditation May not exist as an Ensure quality of If part of NSB If part of NSB may Body independent entity testing and other influence will be under pressure regulated services/ be weak. New to recognize products conform Accreditation Body domestic testing with public policy with International services to promote recognition will own influence have more power Domestic Most state owned Achieve Limited Promote mandatory Slow progress Laboratories laboratories are international testing to generate results in additional not internationally accreditation revenue for demand for testing accredited laboratories services International Provide Deliver quality Medium/High Stand to benefit Laboratories internationally service for profit as provide link from mandatory accredited testing to international testing schemes and verification markets Consumer Likely to be weak Promote value, fair Very low—limited Raising profile Usually do not Groups trade and consumer visibility have the technical safety expertise to engage on regulatory issues International Provide technical Support A4T High as have both Ensuring Technical focus may Cooperating and financial agenda, bilateral technical and compatible NQI result in emphasis Partners support to NQI donors encourage financial expertise facilitates market on provision of NQI consistent access testing equipment with their own NQI (laboratories), and market access and training with interests less emphasis on moving toward a best practice and sustainable NQI 122 Political economy of regional integration in sub-saharan africa The rise to prominence of standards and technical facilitation from the “bottom up.” Locking in reforms at the regulations on the trade agenda is relatively recent with multilateral and regional level requires a legally binding many trade officials being unfamiliar with the technical agreement by the Government which is then subject to issues. Further, the technicians in the National Standards effective enforcement. Formal mech­ anisms for transpar- Organizations unused to taking part in trade negotiations ency and dialogue at the regional level can assist imple- now had the opportunity to access ICP resources (through mentation through “peer pressure.” Ongo­ ing performance A4T) to strengthen their laboratories and empower their assessments and dialogue also increase awareness of institutions. ICP partners recognize the importance of NQI genuine constraints to implementation and enable the in ensuring public safety for both developing and their own regional Secretariat, partner states, and ICP to offer tech- consumers and also for effective market access. nical and financial support. At the Multilateral level the A4T initiative aims to perform this role. 5. Key Findings and 5.1 Ensure Ownership for Trade Facilitation Recommendation for Further Work At the outset identify and map all the stakeholders (actors) involved and identify their interests and concerns—what The approach to trade facilitation has been dominated matters to the different users—small traders, large trad- by projects and is driven from the top down through high ers, clearing agents, facilitators, etc. Ensure from the level political commitments, developments in multilateral outset that there are mechanisms for effective communi- and regional trade fora, and initiatives from ICPs. This cation and dia­logue. The implementation schedule should top down approach follows from the WTO/WCO agree- be developed with the active involvement of the key stake- ments including the recent Trade Facilitation Agreement holders ensuring their concerns are addressed. The timing in Bali, the Revised Kyoto Convention, and the Regional and sequencing of trade facilitation is critical. Beginning agreements—COMESA, EAC, SADC, and more recently the with activities that build confidence and deepen under- negotiations for the Tri­partite. One of the lessons from standing of stakeholders interests will be more sustain- PEA is the importance of combining a top (or high) level able than an approach imposed from a high level political commitment to a strategy of building ownership for trade objective. Externally driven initiatives that do not have a Chapter 5: The Political Economy of Trade Facilitation in Eastern and Southern Africa 123 local champion or driver for change are unlikely to suc- challenges at two border posts—one in the EAC (Malaba) ceed. It is necessary to obtain buy-in from the actors on and one in SADC (Beit Bridge)—using political economy the ground—this is best undertaken by local champions analysis. Adopting the border post as the focal point would for change. The development of a National Trade Portal include all the trade facilitation tasks in the physical move- which promotes transparency by making all the rules, ment of goods as well as the wide range of stakeholders regulations, and tariffs publicly available brings together all involved at the border. the agencies involved in cross border management in a non-threatening manner. References 5.2 Learn from Experience Chilala B., R. Munyaradzi, and G. Evans. 2005. Technical Report: Impact of Proposed Regional Customs Bond Guar- The commitment to trade facilitation and the A4T agenda antee Scheme on Business in Zambia. Gaborone: Southern has now been in place for more than a decade. Additional Africa Global Competitiveness Hub. insights may be gleaned from more in-depth monitoring East African Community. 2007. The East African Community and evaluation which identifies the roles played by spe- Standardization, Quality Assurance, Metrology and Testing cific actors (institutions) in implementing regional and Act, 2006. Legal Notice No. 01/2007. Arusha: East African multilateral trade commitments. Lessons can be learned Community. EU Delegation to the Philippines. 2011. Pilot Case Study of from both the success stories and the areas where coun- Governance in the Trade Facilitation Sector in the Philippines. tries have experienced serious difficulties in advancing Brussels. Capacity for Development. reforms. Detailed evalu­ ations on specific initiatives could Fritz V., K. Kaiser, and B. Levy. 2009. Problem-Driven Gover- provide useful lessons and deepen the trade facilitation nance and Political Economy Analysis: Good Practice Frame- toolbox. Examples include customs valuation, risk assess- work. Washington, DC: The World Bank. ment, Authorized Economic Operator schemes, the use of Grainger, Andrew. 2007. “Supply Chain Security: Adding to information technology, and reforming the national quality a Complex Operational and Institutional Environment.” infrastructure. World Customs Journal 1(2): 17–29. Policies, regulations, organizational structures, and Grainger, Andrew (2011). “Trade Facilitation: A Conceptual admin­ istrative procedures all assist in determining the Review.” Journal of World Trade 45(1): 39–62. incentives facing the actors with a stake in trade facilita- Hoekman B. and S. Jackson. 2013. “Reinvigorating the trade tion. In designing interventions to advance trade facilita- policy agenda: Think supply chain!” VoxEU, January  23. http://www.voxeu.org/article/reinvigorating-trade- tion it is necessary to identify these incentives as they will policyagenda-think-supply-chain assist in determining the pace of reform. The standard Kitenga, G and H . N yangweso. 2010. Accelerating Implementa- recommendation of requiring high level political buy-in is tion of Regional Trade and Transport Facilitation Instruments certainly necessary but is certainly not sufficient. Opposi- in Africa. Arusha: East African Community. tion to reform can originate at a low level and may delay or Lui, Dan and Siziba Clarence. 2012. Trade Facilitation Issues in even derail the process. The champions of reform must try the Political Economy of Regional Integration in Southern to comprehend the institutional power play between the Africa, Maastricht, ECPDM and SAIIA. different stakeholders. McLinden G., E. Fanta, D. Widdowson, and T. Doyle., Eds. 2011. Finally, it is recommended to deepen the analysis Border Management Modernization. Washington, DC: The through detailed case study assessments of specific World Bank. trade facilitation instruments. Such studies should adopt Moise Evdokia. 2013. The Costs and Challenges of Implement- a political economy approach that identifies and maps ing Trade Facilitation Measures. OECD Trade Policy Papers No. 157. Paris: OECD. the interests, motivations, incentives and pressures and Mpata Stallard. 2011. Evaluation of the COMESA/SADC Transit power relationships of all the actors in trade facilitation. Management Systems, Final Report September 2011. Areas for further study may include the introduction of Musinguzi, W., S. Jenders, and T. Diergardt. 2011. Case Story Single Customs Border Posts, adoption of the Authorized II: Establishing a Regional Quality Infrastructure in the East Economic Operator scheme, adoption of WTO Customs African Community. Arusha: East African Community. Valuation, strengthening of national quality infrastructure, Oboth Julius. 2013. A Report of the Study on the Prioritization of and regulatory harmonization and mutual recognition. We EAC Standards and Technical Regulations for Development. would suggest comparing the progress, performance, and Arusha: East African Business Council. 124 Political economy of regional integration in sub-saharan africa Shayanowako, Petros. 2013. Study into the Cooperation of Bor- World Bank. 2014. Logistics Performance Index. Washington, der Management Agencies in Zimbabwe. Tralac Working DC: The World Bank. Paper No. S13WP06/2013. World Customs Organization. 2014. Trade Facilitation Toolkit. Staples, Brian. 2002. “Trade Facilitation: Improving the Invisible Brussels: World Customs Organization Infrastructure.” In Development, Trade and the WTO: A Hand- World Economic Forum, Bain & Co., and the World Bank. 2013. book, ed. B. Hoekman, A. Mattoo, & P. English. Washington, Enabling Trade: Valuing Growth Opportunities. Geneva: DC: The World Bank. World Economic Forum. Tsen, Jonathan and Koh Tat. 2011. Ten Years of Single Window World Trade Organization. 2012. Trade Facilitation National Implementation: Lessons Learned for the Future. United Needs Assessment. Project Description, INT.SUB/TF/16. Nations Global Trade Facilitation Conference. Geneva: World Trade Organization. United Nations Economic Commission on Africa (UNECA). World Trade Organization. 2013. Agreement on Trade Facili- 2013. Trade Facilitation from an African Perspective. Addis tation. Ministerial Decision of 7 December 2013, WT/ Ababa: UNECA. MIN(13)/36 WT/L/911. Geneva: World Trade Organization. United States International Trade Commission (USITC). 2012. World Trade Organization. 2014. Agreement on Trade Facilita- Trade Facilitation in the East African Community: Recent tion: Self-Assessment Guide. TN/TF/W/143/Rev.7. Geneva: Developments and Potential Benefits. Publication No.4335. World Trade Organization. Washington, DC: USITC. Zake, Justin. 2011. Customs Administration Reform and Modern- World Bank. 2014. Doing Business 2014. Washington, DC: The ization in Anglophone Africa—Early 1990’s to Mid-2010. IMF World Bank. Working Paper WP/11/184. Washington, DC: International Monetary Fund. 125 Chapter 6: Political Economy of Transport Sector Integration in the East African Community 1. Introduction The transport infrastructure in East Africa Community (EAC1) member states has improved dramatically over the past two decades. Among the more notable achievements are (1) vast improvements in the quality of the region’s trunk roads; (2) substantial reductions in road travel times; (3) growing compliance with vehicle weight restrictions; and (4) falling transport prices due to the aforementioned changes, mainly along the Northern Corridor. This chapter elucidates the political economy factors that supported these improvements. The findings are largely consistent with recent literature on the political economy of regional integration and transport economics. From the former, the results resonate with existing studies that argue regional integration efforts are most likely to be successful when one country emerges as a leader in favor of integra­ tion and the private sector strongly advocates for it. They also support the thesis that transport prices are likely to fall when (1) transport becomes more efficient, (2) road quality improves, and (3) competition becomes more intense. For many years, the second and third condition existed in East Africa, but not the first. Efficiency is now improving along the Northern Corridor, but less so along the Central one, for reasons the paper will explicate. The result is that transport prices are falling along the former, but not the latter. The next section examines the transport infrastruc­ ture in the region as well as how economic devel­ opment is affecting it. The subsequent section explicates the institu­ tions of the EAC that promote integration and impediments it currently accounts for more than 95% of the EAC’s land to it. Following that it discusses the processes of overcom­ transport, and describe why increases in efficiency are lead­ ing these challenges in areas where it has occurred. Next, ing to falling transport prices. The final section discusses we describe the structure of the transport sector in the challenges to greater integration in the transport sector. region, with a particular focus on the trucking industry as Barak D. Hoffman and George B. O. Kidenda 2. EAC Transport Sector Infrastructure 1 Five states comprise the EAC, Burundi, Kenya, Rwanda, Tanza­ nia, and Uganda. The original EAC, which was comprised of Kenya, Before examining performance in the transport sector, we Tanzania, and Uganda, collapsed in 1977 due to irreconcilable dif­ provide basic data about its size and quality. We examine ferences between the member countries. conditions of the roads, rail, and ports. 126 Political economy of regional integration in sub-saharan africa 2.1 Road Transport TABLE 17: Number of Trucks in the EAC: 2000–2011 Over the past two decades, the quality of the EAC’s trunk roads has improved dramatically. As late as 2000, for Burundi Kenya Rwanda Tanzania Uganda example, there was no fully paved road network linking the 2000 1,935 57,796 1,025 6,314 13,240 major cities in the region. By contrast, paved trunk roads 2001 2,017 58,501 1,116 5,153 14,441 now connect all of them. Today, less than one-fifth of the 2002 59,835 1,162 10,134 15,719 region’s paved roads are in poor condition and nearly half 2003 61,538 1,137 10,917 16,122 are in good condition. Nevertheless, the length of the paved road network 2004 63,999 1,412 12,819 17,530 is very short. Only 10 percent of the region’s roads are 2005 66,472 2,100 7,178 18,684 paved. Outside of the main trunk roads and urban areas, 2006 35,838 2,351 20,496 almost all roads in the region are unpaved. As a result, 2007 42,654 2,784 43,811 23,323 maintaining the existing network and adding to it are both 2008 51,445 3,054 51,477 28,501 high priorities. 2009 60,365 3,319 59,066 33,425 The trucking sector is growing very rapidly. Kenya has 2010 67,668 3,595 64,790 the largest fleet of trucks in the region followed by Tan­ 2011 3,134 zania. This is not surprising given as they are the largest economies in the EAC and are the only countries with ocean ports. The available Kenyan fleet in 2011 was 67,668 recorded trucks in Tanzania between 2005 and 2007 sug­ compared to 64,790 in Tanzania. Uganda had 33,425 gests a change in the method of gathering and reporting trucks in 2009, the latest year for which data are available this information, rather than a six-fold increase in the num­ for the country. These figures come from partner member ber of trucks in a two-year period.2 states reporting to the EAC, so they may not be directly comparable. In particular, the large rise in the number of 2.2 Rail Transport FIGURE 38: Quality of Paved Road Network While rail had been the main form of land transport for decades in East Africa, by the 1990s the railways had nearly 100% collapsed due to years of neglect. Starting in about 2000, 80% the Governments of Kenya, Tanzania, and Uganda began to privatize their rail networks. These efforts were gener­ 60% ally unsuccessful, although there have been some recent 40% improvements along the northern rail corridor operated 20% by Rift Valley Railways. 0% Tanzania’s Central Line has suffered an extreme Kenya Rwanda Tanzania Uganda decline. The railway is barely functional today and in dire Poor Fair Good need of repair. The previous concession of Tanzania Railways to a strategic partner, RITES,3 encountered sub­ stantial challenges and the Government of Tanzania can­ FIGURE 39: Length of Road Network celled it in 2010 as a result. The World Bank has recently in East Africa (KM) given the Government of Tanzania, US $300 million loan to start rehabilitating the state-owned railway. Whether it 80000 will remain so or concession operations to a private pro­ 60000 vider following the Bank’s current rehabilitation project is unclear. Rail along the Northern Corri­ dor has also suffered, 40000 although the drop in traffic is only 85 percent from its peak 20000 0 2 In particular, this timing coincides with the creation of Tanza­ Burundi Kenya Rwanda Tanzania Uganda nia’s Surface Marine Regulatory Authority (SUMATRA). Paved Unpaved 3 Rail India Technical and Economic Service. Chapter 6: Political Economy of Transport Sector Integration in the East African Community 127 FIGURE 40: Kenya Freight Volumes by Rail 8000 7000 6000 Thousands of Tons 5000 4000 3000 2000 1000 0 2009/10 2010/11 1975/76 1976/77 1977/78 1978/79 1979/80 1980/81 1981/82 1982/83 1985/86 1986/87 1987/88 1988/89 1989/90 1990/91 1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 1973/74 1974/75 1983/84 1984/85 FIGURE 41: Port Volumes in Dar es Salaam and Mombasa: 2001–2013 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Mombasa Dar es Salaam in the 1970s compared to a more than 95 percent drop construc­tion of a new standard gauge railway line along along the Central Corridor. In 2006 the Governments of the Northern Corridor between Mombasa and Nairobi. Kenya and Uganda awarded the railway concession to Rift At $4 billion, it is the largest project in the country’s his­ Valley Railways (RVR), a consortium led by Sheltam Ltd of tory. China Exim Bank will finance 90 percent of the rail­ South Africa. It encountered serious difficulties right away. way while the Government of Kenya will fund the balance. By 2010, freight volumes were almost half of 2006 levels The Governments of Kenya, Rwanda, and Uganda aspire to and RVR had invested very little in rehabilitation. IFC and have the railway extend to Kigali, but are far from securing KfW, the German Development Bank, helped restructure the necessary finance and it is unclear they will be able to the RVR consortium in 2010 to replace Sheltam with Cita­ do so given that less than 30 percent of the traffic on the del Group from Egypt, a more experienced rail operator, Northern Corridor flows beyond Nairobi. as the lead investor. After Citadel took over, RVR’s perfor­ mance improved and it is starting to earn profits. 2.3 Ports Governments along the Northern Corridor have very ambitious plans for railway expansion. Kenya has As with the rest of the transport sector, port volume has recently entered into a bilateral contract with China for the grown rapidly, at approximately 7 percent per year, since 128 Political economy of regional integration in sub-saharan africa TABLE 18: Cargo Traffic at Dar es Salaam TABLE 19: Dar es Salaam and Mombasa Cargo and Mombasa Port: 2009–2013 Destination 2011 (Thousands of Dead Weight Tons) (Millions of Tons) Dar es Salaam Dar es Salaam Mombasa 2008/09 2009/10 2010/11 2011/12 2012/13 Volume Percent Volume Percent Imports 6,181 7,089 8,086 8,992 10,443 Total 10.9 100% 19.9 100% Exports 1,237 1,316 1,715 1,749 2,000 of which: Total 7,794 8,552 9,919 10,866 12,530 Domestic 7.8 72% 14.1 71% Burundi 0.4 4% 0.2 1% Mombasa DRC 0.7 7% 0.5 3% 2009 2010 2011 2012 2013 Rwanda 0.4 4% 0.3 2% Imports 16,507 16,201 16,938 18,732 19,150 South Sudan 0.1 1% Exports 2,450 2,575 2,788 3,045 2,983 Uganda 0.1 1% 4.3 22% Total 18,957 18,776 19,726 21,777 22,133 Zambia 1.6 15% 2000. Berth occupancy at the ports of Dar es Salaam and over three routes: the Southern Corridor to Zambia, the Mombasa is close to 100 percent, well above the recom­ Central Corridor, and to northern Tanzania. According to mended maximum rate of 70 percent to allow for efficient the data below, traffic flows are at least three times higher operations. The graph below shows the increase in port along the Northern Corridor than the Central one.4 volume over the past fifteen years. Both desperately need Inefficient port operations, especially in Dar es Salaam, to expand capacity. compound lack of space. Figure 42 shows average ship The annual average container traffic growth rate in turn-around time. This measures how quickly ships off- Mom­ basa port in 2013 was down by 1.0 percent from load and load cargo. This takes three days in Mombasa and 903,000 TEUs in 2012 to 894,000. This was mainly due to just over six in Dar es Salaam. The former compares well the drastic decline in container business in the months of to sub-Saharan Africa’s most efficient port, Durban, while February to April 2013, caused by anxiety prior to the gen­ the latter is one of the least efficient in the world. Crane eral election in March 2013. However, the second half of productivity in Dar es Salaam and Mombasa are fourteen 2013 recovered to register a growth of 7.3 percent when and eighteen moves per hour, respectively, far below the compared with a similar period in 2012. In Dar es Salaam, global standard of twenty-five to thirty. In practical terms, total cargo through­ put increased from 7.7 million tons these data suggest that Dar es Salaam and Mombasa in 2009 to 10.4 million tons in 2013, reflecting an overall ports could process up to 80 percent and 40  percent growth rate of 34 percent and an average annual growth more cargo respectively per year than they currently do of 8.0 percent over the five-year period from 2008–2013. without increasing physical capacity through more efficient Table 19 examines the destination of cargo in the ports operations. of Dar es Salaam and Mombasa. Not surprisingly, both Container dwell time inside the ports of Dar es Salaam ports overwhelmingly serve their domestic market. In addi­ and Mombasa is about ten and five days, respectively. How­ tion, each has one primary transit market, Zambia for Dar ever this is a misleading measure of efficiency. In order to es Salaam and Uganda for Mombasa. Combined, these reduce port congestion, both governments demand that account for approximately 90 percent of the volume for cargo move to inland container depots (ICDs) for clearing each port. The remaining three main destinations, Burundi, and forwarding operations and customs processing rather DRC, and Rwanda are contestable, albeit small, markets for inside the port. Data on the amount of time cargo spend each port. The table also makes clear that the volume of traffic along the Northern Corridor is much greater than the Central Corridor. Mombasa Port is twice as large as Dar es 4 It is difficult to get exact figures for corridor traffic because Salaam and almost all the cargo leaves Mombasa to inland we lack data on the domestic destination of cargo for Kenya destinations using the Mombasa-Nairobi highway. By con­ and Tanzania. However, transit traffic along the Central Corridor trast, a substantial portion of cargo in Dar es Salaam Port was 1.6 million tons, while the Northern Corridor carried at least remains in the city, and the portion that leaves is spread 5.4 million tons past Nairobi. Chapter 6: Political Economy of Transport Sector Integration in the East African Community 129 FIGURE 42: Average Ship Turn-Around Time (Selected Ports) 250 200 150 100 50 0 Mumbai Dar es Tema Mombasa Tianjin Durban Shanghai Hong Port Singapore Ningbo Rotterdam Salaam Kong Klang in ICDs are not easy to get since the government does of cargo in the past, it was under a different institutional not collect this information and it does not require com­ structure and transport environment than currently exists. panies to publish it. In addition, even if such data exited, We describe this in the next section. Beyond these insti­ time to clear cargo from ICDs is not only a function of the tutional and structural issues, political economy factors efficiency of port processing operations, but also depends also are not propitious for reviving lake traffic in the near on the behavior of the depot owners and customers. As a future. In order to resume lake traffic, three conditions that result, container dwell time isn’t a very useful measure of do not exist must occur: port efficiency. The Government of Kenya recently secured $1 billion 1. At least two EAC countries will need to agree on a route from the Government of Japan to build three new container to develop. berths and access roads from the port that bypass the 2. Either Kenya or Tanzania will need to develop func­ Mombasa Central Business District.5 The Government of tional rail service to a port. Tanzania is very keen on expanding Dar es Salaam port as well. It recently signed a Memorandum of Understanding 3. Countries in the region will need to prioritize ferry traf­ with the World Bank, the UK’s Department for International fic over roads and rail. Development, and TradeMark East Africa for a $565 million project to double the port’s capacity by 2020. However, to Currently, political forces in EAC member states do realize the benefits of this expansion, port efficiency will not support these types of plans. The most logical orga­ need to increase as well. Delays in either threaten to mar­ nization to undertake a regional transport plan, the EAC, ginalize the Central Corridor as an attractive transport lacks the capacity for reasons we explain in detail below. route, especially given the concurrent improvements in In the absence of a regional organization that possesses Mombasa Port. The chapter discusses this issue in detail the authority to make these choices, national governments in subsequent sections. must take the initiative. This has not happened around ports on Lakes Tanganyika and Victoria because they are 2.4 Inland Water Transport not a priority mode of transport at the moment. Cargo traffic on Lakes Tanganyika and Victoria are practi­ cally non-existent. While they carried significant amounts 3. Overview of the EAC The contemporary EAC came into force in 2000 with the 5 The new container terminal has three phases. Phase I, funded same three countries as the first failed attempt toward by JICA, has two terminals (berth 20 and 21). Phase II will have regional integration following independence (Kenya, Tan­ one terminal (berth 22), and same with Phase III (berth 23). KPA is negotiating with JICA to fund Phase II also. Phase II is planned to zania, and Uganda), and expanded in 2006 to include be completed in July 2019, while Phase III (which has no funding) Burundi and Rwanda. As with original EAC, there are strong in January 2022. fears among some member states that a common market 130 Political economy of regional integration in sub-saharan africa will benefit Kenya over the other countries in the organiza­ and thus output and export diversification. Although tion.6 A crucial difference is that Rwanda and Uganda are most EAC country authorities have plans to improve willing, at the moment, to accept Kenyan economic domi­ the investment climate, progress to date has been nance within the EAC because the two landlocked coun­ uneven across the region, with only Rwanda imple­ tries place a high degree of importance on driving down menting ambitious and compre­ hensive reforms. transport costs, enhancing access to the sea, and encour­ In addition, reform efforts have not been closely aging trade and foreign investment. coordinated at the regional level, reducing to some EAC efforts at integration are broad based covering extent their impact. political, economic, and social sectors of the participating countries. Four sequential initiatives guide these efforts: There are numerous explanations for the gap between ■■ Customs Union; EAC integration plans and their execution. One impor­ tant reason is that the private sector has not advocated ■■ Common Market; strongly for it. This is changing as Kenyan firms in particular ■■ Monetary Union; and are investing more regionally and are thus placing pres­ ■■ Political Federation sure on their government to accommodate their needs. This is con­ sistent with how integration often happens. Mat­ The community envisions transitioning from one stage tli (1999), for example, shows clearly that demand for inte­ of integration to the next. Member states have developed gration generally tends to come from the private sector. a set of protocols for each initiative. This follows the stan­ Moreover, Cowles (1995) attributes much of the success of dard textbook model of sequentially deepening integra­ EU integration to private sector as well. tion per­haps best exemplified in the spirit of the European The private sector is not inherently pro- or anti-­ Union, if not the exact practice.7 integration, however. Rather, it seeks to protect its inter­ As in many other regional economic communities ests. For some companies in the EAC, regional integration (RECs), implementation of many EAC acts at the domestic is an opportunity, while for others it presents a threat. For level lags regional-level endorsement of them by heads of exam­ ple, while trucking companies have been at the fore­ the member states. According to a recent IMF review of the front of pressing governments in the region to improve EAC (McAuliffe, Saxena, and Yabara 2012, 39): transport efficiency, they generally support efforts to restrict foreign competition in the transport sector. More­ While EAC members have embraced market-sup­ over, some members of the Kenya International Freight portive policies at the broader level and often put Forwarders and Warehousing Association (KIFWA) and Tan­ in place legal frameworks amicable to investors, zania Freight Forwarders Association (TAFFA) see greater business surveys show that enforcement is prob­ integration in the transport sector as a threat. They are lematic. Investment incentives are uncoordinated therefore campaigning against the move to allow foreign and often enterprise-specific. Such obstacles not Clearing and Forwarding (C&F) agents to handle domestic only constrain investment and export levels, but cargo as the single cus­ toms territory theoretically allows. also hamper private investment in infrastructure, Other freight forwarders, by contrast, see it as an opportu­ further increasing costs; and they deter innova­ tion, nity for partnerships and mergers between the Tanzanian and/or Kenyan forwarders and their counterparts in the landlocked countries. 6 There is strong academic evidence to support this argument. Another source of the EAC’s weakness is differing Venables (2003), for example, argues that the gains from regional views on integration between Tanzania on the one hand, integration among low income countries will accrue almost and Kenya, Rwanda, and Uganda on the other. Due to entirely to the country with the most sophisticated economy. The paper uses EAC integration in the 1960s and 1970s as an example. geogra­ phy, integration is far more important for Burundi, Mutual gains from comparative advantages, Venables argues, only Rwanda, and Uganda, than Kenya and Tanzania. The lat­ begin to accrue as economies become more specialized. Collier ter two are the largest economies in the EAC8 and the and Venables (2008) argue that policy coordination, agglomera­ only ones with access to the sea. The former three are far tion, increasing market size, and joint production of public goods smaller and more than one thousand kilometers from the (e.g., infrastructure) partially offset these losses. 7 Integration in Europe was far slower and more haphazard than the textbook model suggests. The chapter discusses this divergence in more detail below. 8 Kenya and Tanzania’s GDP. Chapter 6: Political Economy of Transport Sector Integration in the East African Community 131 nearest ocean port. As a result, regional integration is a necessitated detailed paperwork and checks on necessity for Burundi, Rwanda, and Uganda, while it is far fuel and goods at each frontier, resulting in lengthy more optional for Kenya and Tanzania. At the moment, the border delays for trucks moving parts from plant private sector in Kenya has placed more pressure on its to plant, and different regulations on axle weights, government to expedite regional integration, while these truck safety, vehicle exhaust emissions, and hours demands remain more latent in Tanzania. Due to the afore­ permitted behind the wheel. mentioned factors, the Governments of Kenya, Rwanda, and Uganda have taken the lead in a number of areas of As Preston (2012) shows, this was not because of lack EAC integration, such as infrastructure development, sin­ of a policy for transport sector integration, but due to very gle tourist visa, enhanced labor mobility, and implementa­ slow implementation of the 1957 Treaty of Rome’s Com­ tion of the single customs territory. Government support mon Transport Policy (CTP). The EU’s level of development and private sector demand both have played a role. Such when it implemented the CTP was far higher than income flexibility need not be an impediment to integration, but levels in the EAC today as well. can help facilitate it. As we will explain, the transport sector in the EAC is Due to the aforementioned domestic challenges, the following a similar trajectory, and as a result, we have EAC is not able to ensure implementation of integration. wit­nessed rapid progress in the integration of this sector Rather, integration efforts are mainly occurring at the over the past few years, especially along the Northern national level and thus subject to domestic political incen­ Corridor, due in large part to pressure from the private tives and constraints. As Byiers, Vanheukelom, and de sector. Recent results include reducing border crossing Roquefeuil (2013, 14–15) observe: times, eliminating many weighbridges and police check­ points on the roads, and growing compliance with weight The EAC has succeeded in establishing a range of restrictions. In these cases, regional governments, formal organs including the East African Court of especially the Government of Kenya, were responding Justice, the East African Legislative Assembly and to specific pressure from the private sector as well as various sectoral committees. . . However, indicative other presidents in the region. We discuss how this has of wider concerns, the EAC has achieved greater occurred in subsequent sections. Prior to that it is use­ convergence in simplifying and lowering the cost of ful to discuss the planning process for regional transport regulatory processes for businesses than in provid­ infrastructure is occurring in the EAC at the moment. ing the implementation teeth to those legal institu­ tions that are relevant to business regulation. . . 4. Development of Transport Underlying the slippage in the implementation of these formal declarations and protocols are Infrastructure a range of concerns and political positions that For many decades, rail was the dominant mode of trans­ appear likely to hinder progress . . the practicalities port in East Africa. However, over the past two decades, of proceeding with regional integration appear to road transport has a near monopoly on land transport, rely on a group of countries with greater interest in although governments in the region are attempting to rec­ and political reliance on the regional project. tify this imbalance. This section reviews the development of transport infrastructure in East Africa and identifies con­ This is a very accurate description of how recent inte­ temporary challenges. gration reforms in the transport sector have occurred as we will show. Nevertheless, it is important to place EAC integration in a comparative context. For example, it com­ 4.1 Historical Evolution pares favorably to the EU’s integration in the transport sec­ From the creation of East Africa Railways and Harbors tor. According to Mattli (1999, 77) as late as the 1980s: (EARH) in 1948 until the collapse of the original EAC in 1977, EARH had a near-monopoly on long-distance manufacturers who began in those years to pro­ transport in Kenya, Tanzania, and Uganda. EARH oper­ duce and market on a European rather than nation- ated more or less as a private company, responsible for by-nation basis were confronted with bur­ densome maintenance from its own revenue and relatively free obstacles: different national tax regimes that from government interference.9 It ran the ports of Dar 132 Political economy of regional integration in sub-saharan africa es Salaam and Mombasa, ports on Lake Victoria, the 4.2 Contemporary Challenges railways in all three countries, and was the sole trans­ The EAC road network carries far more than its optimal porter on the railways and Lake Victoria. Roads were share of traffic. This has exerted substantial pressure on very underdeveloped compared to rail at that time, by the region’s roads, leading to damage from overloading contrast. and high road maintenance costs. The Government of The collapse of the EAC in 1977 led to the disman­ Kenya has a focused plan to address this imbalance along tling of EARH. The Governments of Kenya, Tanzania, the Northern Corridor through ongoing service enhance­ and Uganda broke up the company into five constitu­ ment by RVR and the Standard Gauge Railway, although ent parts (Kenya Rail, Tanzania Rail, Uganda Rail,10 Kenya the former is operating far below expectations and the lat­ Ports Authority, and Tanzania Ports Authority) and put ter is far from operational. Reviving rail along the Central them under government control. Reconstituting EARH Corridor requires substantial effort from the Government as government agencies made them dependent on of Tanzania, although it is far less exigent due to the far government budget allocations for maintenance and lower levels of traffic. provision of new equipment, and more subject to gov­ Another large barrier to the development of a compet­ ernment interference than hitherto existed. Subsequent itive and effective transport sector in the EAC is the lack of economic stagnation in the region and political instabil­ funding. Despite the massive improvement in trunk road ity in Uganda caused governments to underinvest in the quality over the past two decades, only 10 percent of the transport sector, especially the railways. In addition, they region’s roads are paved. In particular, the paved road net­ also forced the railways to provide uneconomic services, work does not serve large parts of northern and eastern such as low passenger fares and rates for carrying gov­ Kenya, and southern and western Tanzania. Moreover, ernment cargo, but failed to reimburse the railways for nearly all of the highways are just one lane in each direc­ these subsidies. Eventually this led to a severe deteriora­ tion. In addition, EAC countries are also planning massive tion in the railway and port infrastructure. Ports on Lake investments in ports, railways, and airports. Finding the Victoria and Lake Tanganyika suffered the most as they sums of money necessary for this infrastructure develop­ were dependent on smooth functioning ocean ports and ment and maintenance will be a challenge for the foresee­ railways for their cargo. able future. When growth returned to the EAC in the late 1990s In addition, road development has not kept pace with and early 2000s, governments in the region chose to the region’s rapid pace of urbanization. This has resulted in invest in road construction and rehabilitation, but not in increasing congestion in the region’s major cities: the devel­opment and maintenance of the region’s rail­ ways, as we discussed above. Today, the regional road ■■ All trucks leaving Dar es Salaam and Mombasa Ports network is quite good and, perhaps more importantly, a must pass through the central businesses districts in number of politically powerful trucking firms have come both cities. Plans for expanding Mombasa Port envision into existence in Kenya and Tanzania. For example, a for­ a by-pass road to address this issue. mer president of Kenya, Daniel Moi, and the current one of Tanzania have family members running large trucking ■■ The Mombasa County Government permits Container companies. Freight Stations (CFSs) to operate in the center of Mom­ basa. This not only reduces land available for commercial and/or residential development, it also causes massive traffic jams for the thousands of trucks shuttling back and forth from the port to the various 9 A 1955 World Bank appraisal of EARH was very positive. It CFS’s. The expanded port may resolve this issue if stated (World Bank 1955, i-2) “The EAHRA is an efficient organi­ more efficient port oper­ ations obviate the need to zation . . . it has regularly shown a fair surplus of revenue. . . Its store cargo in CFSs or if the new Mombasa bypass road financial position is sound. . . The management of the Railways and Harbours is excel­ lent. . . There is no doubt of the ability of the encourages CFS owners to relocate outside the city. management and staff to . . . operate the transport systems in an ■■ There are no bypass roads in the major cities in the efficient and satisfactory manner.” At the time, EARH employed region. As a result, every truck in the region must go 62,000 people of whom 2 percent were European, 8 percent were Asian, and 90 percent were Africans. through the center of each city it passes, adding to 10 Uganda never created a ports authority. Rather, ports fell the already massive urban congestion in East Africa. under the control of Uganda Railways. Kampala and Nairobi are constructing ones, however. Chapter 6: Political Economy of Transport Sector Integration in the East African Community 133 Congestion around the ports contributes apprecia­ importers/exporters and transporters toward more efficient bly to inefficiency in the transport sector. Transporters in movement of goods, especially along the Northern Corridor. Mombasa, for example, claim that it takes on average four When volumes on the region’s transport networks were low, to six days to offload an empty container, service the truck, trucking companies placed a substantial amount of effort pick a loaded container, and start a new journey. This into seeking the greatest cargo load per trip because it was unproductive time is nearly equivalent to one round trip to scarce. Importers and exporters were largely indifferent Kampala so amounts to at least $3,000 in lost revenue per to this. However, sustained high GDP growth rates have trip. Some firms have addressed this inefficiency by plac­ changed incentives for transporters and many private sec­ ing depots on the Mombasa-Nairobi highway. They use old tor firms in favor of reforms to improve efficiency. trucks to shuttle cargo between the depot and the port, As the private sector develops in the region, for example, and new ones only for inter-city transport. This allows more supply chain management has become increasingly import­ modern trucks to minimize turn-around time because they ant, especially for manufacturers, builders, and importers in can avoid the port completely. By-pass roads are the opti­ the consumer retail sector, such as Nakumatt, Tuskys, and mal solution and are currently planned in Mombasa. Uchumiwhich, who seek to ensure full stocks of a range of Improving public safety on the roads is another substan­ imported foods in its disbursed network of stores,11 and tial challenge to the development of an efficient transport on-line retailer Jumia, which promises seven-day delivery sector. Despite the small size of the paved network, all EAC anywhere in Kenya. Likewise, as transport volumes grow, member states have very high levels of road fatalities. This most leading trucking companies increasingly focus more is primarily a governance challenge because it is due, in on fleet volume than truck volume, and now view the sys­ part, to poor enforcement of vehicle quality and traffic reg­ tem of roadblocks and weighbridges as constraints on the ulations. The roads in the EAC as a result are clogged with amount of cargo they could carry. As a result, over the past crowded and poorly serviced vehicles that provide unreli­ few years, private sector demand for more efficient trans­ able services, lead to frequent accidents, and often cause port networks has become intense especially along the long and unpredictable transit times as a result. With the Northern Corridor. EAC leaders have taken ambitious steps gradual improvements in the EAC road infrastructure to improve the business environment in the transport sec­ there is a great need for transporters to improve the safety tor. Among the more impressive positive results are: and reliability of their vehicles. The Government of Kenya is ■■ The removal of roadblocks, weighbridges, more taking the lead on addressing these issues through plans efficient administrative procedures, and eliminating to improve enforcement of road regulations and develop multiple bonds has reduced the transit time to move more stringent requirements for vehicle and driver quality. a container from Mombasa to Kampala and Kigali from The final challenge of infrastructure planning is slow 18 to 4 days and 22 to 7 days, respectively. progress in expanding Dar es Salaam port and its potential ■■ Axle load limits have also been standardized in the EAC deleterious impact on the further development of the Cen­ at 56 tons for the Gross Vehicle Weight inclusive of the tral Corridor. Freight forwarders and transporters in Burundi cargo. and Rwanda, for example, are presently considering routing their containers through Mombasa and Teveta on the bor­ ■■ Partial implementation of the Single Customs Territory der between Kenya and Tanzania because of slow process­ (SCT) is beginning to occur. ing times at Dar es Salaam port compared to Mombasa. The ■■ Increasing power of trade associations to influence Government of Kenya already has secured the funding that policy design and implementation. will allow it to rehabilitate the road to Taveta. This section discusses how this has occurred in the aforementioned areas. 5. Successes in Overcoming Integration Barriers 5.1 Regulatory Harmonization For many years, the transport sector was stuck in a sub-op­ EAC member states are making some progress on regu­ timal equilibrium where over-loading was common and gov­ latory harmonization in the transport sector. Axle load ernments in the region responded by building numerous roadblocks and weighbridges. Rapid economic growth since 11 Combined, these retailers operate approximately 150 stores the turn of the millennium changed the preferences for in East Africa. 134 Political economy of regional integration in sub-saharan africa harmoni­ zation is one such area. This is perhaps one of The predicament facing the drivers and truck owners is the most important policy issues in the transport sector that they often have only limited control over weight distri­ because it determines the maximum weight a truck can bution of the cargo they carry. For example, asphalt cannot carry. Harmo­ nization seeks to have all EAC member states be redistributed as it solidifies and can only be removed use the same policy for axle load. after heating to very high temperatures. The transporters Difficulties in axle load harmonization are an excel­ also maintain they cannot open transit goods in order to lent example of commercial disputes masking as techni­ redistribute weight between border posts in the absence cal discussions. The core issues of the debate are whether of customs agents. Transporters contend that such un- countries in the region should weigh trucks using Gross witnessed breaking of the customs seals exposes the Vehicle Weight (GVW) or individual axle weight, the rea­ transporters to the risks of pilferage and damage to cargo sonable allowance for overweight vehicles, and the types for which the clients hold the transporter liable. The trans­ of fines. However, under­ neath the surface it is clear that porters also face the dilemma of carrying containers on the difficulties in reaching a common policy are less about trailers with weak and sagging suspensions on their rear technical coordination than trucking domestic industries axles. This causes the weight load to tilt toward the back, pressing their governments to provide them an advanta­ exerting a heavier load on the axles while the truck and geous policy environment. Below we describe challenges the containers are still within the GVW limit. There is, how­ to axle load harmonization as well as recent progress in ever, no current legal provision to handle the issue. One resolving it. Because Kenya and Tan­ zania have the largest solution would be to not allow them on the roads, but this trucking sectors in the region by far, the debate has largely would be unpopular and difficult to enforce. been between these two countries The EAC passed the Vehicle Load Control Bill in May 2013. The Bill sets the permissible maximum gross vehicle weight at a metric tonnage of 56 and permits the vehicles to have up to seven axles. Kenya and Tanzania do not interpret the bill the same way however. The Kenya High­ way Authority (KenHA) gives a strict allowance of 400 kilo­ grams per axle and a max­ imum GVW of 56 tons with no allowance to transporters for overweight trucks. By con­ trast, the Tanzania Roads Authority (TANROADS) allows up Container loaded on a weak and tilting trailer suspension to 3,000 kilograms allowance on the GVW. The Kenyan gov­ ernment also subsequently imposed new axle rules that Finally, even compliant trucks are harassed at times require transporters to load a maximum of 56 tons for a by the police. During our interviews with truck owners on six-axle truck, less than the seven axles the EAC Vehicle the Northern Corridor were told of some cases of enforce­ Load Control Bill permits. ment officers following trucks cleared by weigh-in-motion Problems with harmonized standards are a domestic bridges and bringing them back to be weighed motionless. as well as regional problem. For example, the implementa­ Due to lack of proper calibration of the machines, such tion of vehicle load control continues to be a contentious trucks are at times found to be overweight on one or two matter between the national transporters associations axles and penalized thus negating the purpose of weigh­ and the National Highways Authorities managing transport ing in motion. Petty harassment like this, often in order to corridors in Kenya. KenHA’s introduction of the axle based solicit bribes, is common on the region’s roads, although weighing of cargo rather than gross vehicle weight to con­ governments are taking steps to reduce its frequency. This firm compliance met stiff resistance from the Kenya Trans­ matter needs further verification and rectification where porters Association (KTA) who took the matter to court. necessary. They preferred the use of the vehicle’s gross weight, which While EAC member states are making progress on axle was then pegged at 48 tones for a truck with six axles. load harmonization, there nevertheless exist a number of KenHA, on the other hand, held firm, insisting that its pref­ outstanding related issues such as: erence for the axle weighing is because the axle (wheels) ■■ Transport sector liberalization. There is no existing exerts pressure on the road, not the entire weight of the EAC policy for a liberalized regional transport sector truck. KTA lost the court battle after one year. where trucks can deliver cargo between any two points Chapter 6: Political Economy of Transport Sector Integration in the East African Community 135 in EAC territory regardless of the intra-EAC borders. Committees (JBCs) at sixteen border posts in East Africa. Rather, each member state has its own policy designed, JBCs are working groups made up of government agencies in part, to protect domestic trucking industries through and private-sector stakeholders involved in cross-border restricting cross-border operations. EAC is, however, trade. They facilitate coordination between government not unique in this aspect. Cabotage has always been a agencies and businesses to enhance efficiency at borders contentious issue even in other regional trading blocs (USAID/COMPETE 2013). like the EU and the US. The most notable achievement has been to substan­ ■■ Approach to overloading. In Kenya it is a criminal tially reduce border crossing times at Malaba, by far the offence to overload, while all other EAC states have EAC’s busiest border crossing, between Kenya and Uganda. decriminalized it. It’s an excellent example of how regional integration often occurs. For many years, the border post had been in a ■■ Charging policies. The extent of cost recovery (fines sub-optimal equilibrium. Rising trade volumes led to a versus actual cost of damage) varies throughout the proliferation of agencies at the border performing a range region. of regulatory functions. There was little coordination and ■■ Liability for overloading. EAC member state laws hold side-payments to facilitate quicker processing times were the owner of the truck responsible for any overload­ common. As a result, border crossing times became slower ing instead of the owner of the cargo. However for and slower. At the same time, rising trade volumes caused imported containers, the importer in consultation with affected private sector firms to see the procedures at the the exporter determines the weight. Under the current border as an increasingly onerous burden. law, even though the importer indirectly pays for the In 2009, relevant government agencies and trade penalties, the truck owners/drivers bear the bigger associ­ ations, with the assistance of development partners, burden through time loss, bribes, and reduced trips. began to develop a platform for reducing congestion at the However at a meeting in Kampala in August 2014, region’s borders. Importantly, development partners did the trucking industry stressed that EAC Axle Load not attempt to provide a solution to the problem. Rather regulation should consider the shipper liable as well. they assisted in coordinating the relevant entities to help They have yet to amend the law appropriately. them design their own solutions. Government and private ■■ Vehicle standards. The EAC does not have common sector representa­ tives held joint meetings to explain the standards for vehicle importation. In particular, in various problems at the border, such as time to cross and Kenya one cannot import vehicles which are more than number of procedures, from their perspectives. This strat­ eight years old while in other EAC states older vehicles egy ensured that ownership would come from the partici­ are allowed. The Government of Kenya nevertheless pants, and would allow them to address the issues they allows these vehicles to operate in the country. This see as most relevant and ignore less important ones. What puts the Kenyan transporter at a disadvantage, as he/she emerged from the discussions was that from the private is restricted on the price of vehicles that he/she can sector perspective, the key issue wasn’t the number of pro­ obtain on the international vehicle market. cedures or the various fees and facilitation payments, but the time to cross the border. As a result, they were ame­ nable to solutions that would permit faster crossing times. 5.2 Border Crossings This was also acceptable to many (but not all) government Border waiting times in the region have fallen substantially participants. Strong private sector support for the pro­ over the past few years. Much of it has been the result gram was critical because they were willing to place pres­ of efforts of the governments and private sector working sure on their governments to go along with the proposal with the assistance of development partners such as DfID, and jointly develop a plan. In addition, the groups came to USAID, GTZ, and World Bank. Since 2009, for example, a voluntary agreement, rather than push for official rec­ the USAID-funded Competitiveness and Trade Expansion ognition in order not to lose momentum. This reinforces (COMPETE) program has been working to improve the effi­ the importance of taking a flexible view toward integration ciency of operations at border posts in East Africa. A major that we discussed earlier. The results have been extremely compo­ nent of their efforts has been assisting governments impressive. According to a 2012 study done by the sub- and the private sector to coordinate border management Saharan Africa Transport Policy Program (SSATP), crossing through the establishment and support of Joint Border times at the border dropped from twenty-four hours in 136 Political economy of regional integration in sub-saharan africa 2011 to less than four hours in 2012. The study estimates in the port and along the roads, including removing road­ that, thanks to improved management and coordination in blocks and weighbridges. Malaba, the corridor now saves over $69 million per year Government initiative also deserves a large part of the because of this reduction in time.12 credit for improved road conditions. The Tanzania National Roads Agency (TANROADS), for example, reduced the propor­ tion of poor trunk roads from 50 percent in 2000 5.3 Road Conditions and Transit Times to 5 percent by 2010. It also has introduced performance- The quality of road infrastructure has improved greatly in based road maintenance contracts. Under these contracts, the last two decades. This has resulted in shorter transport firms charged with road upkeep only receive payment if times and lower maintenance costs. The trunk roads in they meet the specified quality conditions. most of the region are in fair or good condition, including the entire length from Mombasa to Bujumbura via Kam­ 5.4 Implementation of the East African Single pala and Kigali. In addition, the Government of Tanzania Customs Territory has greatly expanded the trunk road network in Western Tanzania to the border with Burundi. The Government in The implementation of the Single Customs Territory (SCT) Burundi has also begun to rehabilitate its network to the along the Central and Northern Corridors is the latest border with Tanzania. As a result, the roads of the North­ move to enhance intra-EAC trade and lower expenses for ern and Central corridors are very close to a complete businesses. Not to be confused with a Customs Union, the paved circuit. SCT allows transporters to pay customs for their final des­ Road maintenance has also improved substantially, tination at the port of entry. It thus reduces transit times at espe­ cially in Kenya, Rwanda, and Tanzania over the past EAC borders. Member states are in the process of setting decade. Much of this has been through strong pressure up one-stop Electronic Single Window System (eSWS) for from donors and trucking companies. The latter have been cargo clearance in the region. Kenya, Uganda, and Rwanda an extremely strong pressure group mainly out of self- have taken the lead in this process. interest. This is because poor road conditions raise their The Single Window System allows the use of Regional maintenance fees and slow travel times. Customs Transit Guarantee (RCTG) to cover transit goods Finally, there has been a sharp reduction in the num­ from or to the ports. Trucks that have RCTG are not ber of roadblocks and weighbridges, especially along the required to have multiple national transit guarantees. Northern Corridor. As with the Joint Border Committees, Instead the single RCTG cover is accepted throughout the these changes have substantially improved travel times. customs territory. In Mombasa, there are plans to inte­ For example, transit times from Mombasa to Malaba have grate all port community members’ systems into the Kenya fallen from ten to fifteen days as late as 2010 to two to National Electronic Single Window System by December three days in 2014. 2014 and have 70 percent of cargo use the green channel. As we have mentioned, Kenya’s private sector has The SCT integration program, not surprising, is expe­ pushed hard for many of these gains. Soon after President riencing implementation challenges. For example, there is Kenyatta came into office, for example, a range of ship­ concern by stakeholders that there has not been proper pers’ and importers’ associations, such as the Shippers’ coordination under the customs departments. The coun­ Council of East Africa (SCEA), the Kenya Private Sector Alli­ try revenue authorities also have been slow to issue pass­ ance (KEPSA), and the East Africa Business Council (EABC), words to the freight forwarders thus impeding the rollout engaged in a sustained lobbying effort to improve the per­ of the program. In addition, the export management team formance of the transport sector. Shortly after engaging and the project coordination team are not working in tan­ the president, he announced a sweeping set of reforms dem. Furthermore there has not been sufficient training of the freight forwarders in the use of the eSWS. These predictable difficulties are slowing down the integration 12 According to Fitzmaurice and Hartmann (2013, 8), “estimates process, but are very unlikely to stall or reverse it. of the monetary costs of the delays were at $247.40 per 24 hours for a truck, and $137.00 for the goods, a total of $384.40 for a loaded truck. On the basis of 600 trucks per day, over 360 days, 5.5 Business Associations and a savings averaging of 20 hours, the total annual savings can be estimated at $69,192,000 ($44,532,000 for the trucking enter­ A number of National Business Associations have formed prises, and $24,660,000 for the traders).” apex bodies that promote harmonized business processes Chapter 6: Political Economy of Transport Sector Integration in the East African Community 137 and better engagement with governments in trying to Northern Corridor. The Northern Corridor Transit Trans­ improve the business climate in the region. Their perfor­ port Coordination Authority in 2012 launched the Trans­ mance is uneven across sectors and countries. At one end port Observatory Project (TOP) as a tool for monitoring of the spectrum are powerful organizations that have been the performance of the Northern Corridor. The TOP uses very effective in improving transport sector integration. a set of predetermined Corridor Performance indicators The East Africa Business Council (EABC), the Kenya Man­ (CPIs) to measure transport sector performance. The pro­ ufacturing Association (KMA), and the Kenya Private Sec­ gram aims to enhance the use of evidence-based decision-­ tor Alliance (KePSA) are good examples, as we explained making by providing easy access to reliable data. Having above. More­ over, competent transport sector associations multiple stakeholders and data sources, including elec­ like Kenya Shippers Council (KSC) and the Uganda Ship­ tronic data and surveys, the TOP collects data points such pers Council (USC) have made the Shippers Council of East as duration of trips, traffic delays, truck volume and capac­ Africa (SCEA) a powerful advocate for regional integration. ity, transit rates and costs, efficiency, and productivity. The Some effective business associations are supporters observatory data are available on the Internet. The Central of some efforts for greater transport sector integration, Corridor Transit Transport Facilitation Authority (CCTTFA), but not others. For example, the Kenya Transport Associa­ by contrast, is lagging in this area.13 In addition, the SCEA tion (KTA) and the Tanzania Transport Association (TATOA), also produces an annual logistics performance survey the strongest EAC transport associations, lobby hard for the entire EAC that examines transport prices, travel for improved efficiency along the region’s roads, but not times, and volumes. All of the aforementioned organiza­ ize it. Rather, these organizations advocate efforts to liberal­ tions make their data available for free and place it on the protecting their sector from greater regional competition. Internet. Finally, many business associations in the sector are The cumulative impact of the aforementioned changes weak. For example, the Kenya International Freight and has led to falling road transport costs and prices. We Warehousing Association (KIFWA), which for many years examine how and where this has occurred in the following was the model freight forwarding association for EAC, section. has become embroiled in a number of court cases over its internal election processes and its effectiveness has suffered as a result. The decline also has discouraged 6. Structure of the Transport professionally run freight forwarding companies from Sector participating in it. Consequently, the lead­ ership of KIFWA remains largely in the hands of owners of small companies How the changes we discussed in the previous section with little experience in effectively engaging governments affect transport prices depends heavily on the structure in policy dialogue. There also exist two rival freight forward­ of the transport sector. Transport prices can fall due to ing associations in Uganda, the Uganda Clearing Industry improve­ ments in road quality, reductions in transport and Forwarding Association (UCIFA) and Uganda Freight times, and/ or increased competition. The previous sec­ Forwarders Association (UFFA). Efforts to merge the two tion examined the processes that led to the first two out­ associations into one national association have failed in comes. However, Raballand and Teravaninthorn (2009) the past due to uncompromising leadership styles. Such contend that while achieving these outcomes will bring lack of cooperation undermines their influence on policy down transport costs, it won’t necessarily reduce transport in the sector. prices. Rather, lack of competition in the transport sector Lack of financial sustainability is a challenge for many can permit firms to increase their profits if costs fall. This organizations. While the potential is great for the associa­ section examines the degree of competition in the trans­ tions to mobilize internal funding, often lack of transparency port sector to determine whether falling transport costs and poor leadership has created disillusionment among are reducing transport prices in the EAC. We do so by first members and therefore some of the associations survive examining the profile of sector and then by looking at costs only on donations from international development partners. and prices. 5.6 Data and Transparency Data about conditions of transport networks has improved 13 At the time of completing this document, September 2014, substantially over the past few years, especially along the the CCTTFA’s website was not functioning. 138 Political economy of regional integration in sub-saharan africa 6.1 Firm Profiles However, consistent access to cargo is only one chal­ lenge. A second one that C&F and transporters alike must According to (Harttman and Asebe 2013), road cargo overcome is the need for a large supply of cash or lines transport operators face a range of challenges that vary of credit that allow them to purchase as much cargo as according to the size of fleet, entrepreneurial exposure of possible. C&F agents and transporters must spend their the fleet owners, and their management styles. The most own money shipping cargo before customers pay. Many significant factors that account for cost of transport and importers are unable to pay for their shipments at the ability to compete effectively in the sector are: time of delivery and ask for credit as well. Thus, a medium ■■ Vehicle costs and bank interest rates size operator (e.g., fifty trucks) carrying purely third-party ■■ Costs of fuel and spare parts cargo could easily find itself owed $100,000 in products it has already shipped. As a result, pure shipment com­ ■■ Cargo availability panies are likely to always have large outstanding balance ■■ Road quality and transport times sheets. In addition, since profits in the transport sector are ■■ Ability to supply credit tightly linked to the volume of cargo a company can carry, firms that want a high volume of business must be able to access very large amounts of finance. Due to the aforementioned factors, the EAC trucking Scaling up for small trucking companies is risky. An sector is currently bifurcated. At one end of the spectrum eight-year-old truck and trailer costs about $100,000 in are the large and professional operators. The largest 5% of East Africa. Businesses tend to finance it through a com­ firms operate 45% of the truck fleet in Kenya and 40% in bination of their own cash and bank loans. The latter tend Tanzania, for example. At the other end are a large num­ to be short-term (less than five years) at interest rates ber of very small and informal firms. Approximately 50% of around 17%. This is roughly equivalent to approximately the enterprises in Tanzania operate seven trucks or less $1,500 payment per month. As we will demonstrate in the and four or less in Kenya. In Rwanda, almost 80% of the cost section below, covering these loans is very difficult. In enterprises operate only one truck. addition, increasing fleet size without having access to suf­ An examination of the environment in which the truck­ ficient cargo volumes is likely to lead to idle capacity. Such ing sector operates explains its bimodal distribution. The an outcome is cata­ strophic for firms that have bought their analysis makes clear that large trucking companies are trucks on credit. While financing a truck from one’s own unlikely to survive through transport alone and small account solves the bank repayment problem, it reduces companies face considerable barriers to expanding their the amount of cargo a company can finance and hence operations. The place to begin is to recognize that truck­ could constrain its ability to increase the volume it can ing is not a stand-alone service, but embedded in a larger afford to carry. transport and logistics process. Truck owners don’t simply Given these challenges, the bifurcated structure of go to the port, pick up cargo, and negotiate with a cus­ the industry is easy to understand. Operating a large fleet tomer. Rather, they obtain cargo from clearing and for­ requires (1) large cash reserves and/or a large line of credit warding (C&F) agents that have already negotiated a price and (2) excellent relations with C&F agents as well as port with the customer. The transporter can then determine authorities. Only firms well established in other areas will whether to use his or her own truck, or sub-contract it. have the former, while only those with extensive port oper­ Transport companies also need consistent access to cargo ating experience will have the latter. Thus, it is not sur­ in order to have a large volume of business. Because such prising that large trucking firms have one or more of the information is not available publicly at the moment in Dar following characteristics: es Salaam or Mombasa ports, to get a con­ sistent supply ■■ Regular contact with C&F agents of cargo requires forming close relationships with expe­ rienced C&F firms that are able to process cargo quickly ■■ Direct access to freight through the port. Thus, access to information about freight ■■ Are combined with C&F services is the first hurdle a transport company must overcome. As ■■ Carry their own goods a result, at the moment, only transport companies that have close ties to shipping and/or C&F firms know when ■■ Have contracts with large importers specific cargo will be coming into the port. ■■ Have the ability to provide credit Chapter 6: Political Economy of Transport Sector Integration in the East African Community 139 Given the above factors, small-scale operators face enormous risks and challenges in expanding their fleet. BOX 4: Steps and Costs to Move a As a result, the sector is bifurcated between established, Container from Mombasa to Uganda large-scale firms that combine third-party transport with 1. Vessel arrives in port. some other form of business and small-scale operators 2. Container loaded on to truck for delivery to dependent on sub-contracts from larger firms. Container Freight Station (CFS). This also explains why there are a large number of very 3. Container arrives at CFS and awaits customs old trucks on the roads in East Africa. Large firms have processing by consignee or Clearing and For­ many price advantages that smaller ones do not. Large warding Agent (CFA). firms can charge higher rates than smaller ones because 4. CFA negotiates transport charge with trans­ they can provide credit, while many small firms cannot. In porter and price with customer. addition, reliable firms can charge higher prices for cus­ 5. CFA processes the cargo through Customs. tomers needing high-quality service because they can Pays duties and taxes (domestic destination) or operate more effi­ciently than small ones. The latter tend to executes a Customs Bond (foreign destination). wait many days in the port before starting their next jour­ 6. CFA pays container deposit ($4,500) to shipping ney due to the aforementioned challenges of finding new line and obtains delivery order. cargo. By contrast, large firms that have consistent access 7. Goods are verified by Customs and other rel­ to cargo can operate depots outside congested port areas evant authorities then released. and use dilapidated trucks to ferry cargo from the port 8. CFA pays CFS charges and instructs transporter to the depot. This permits their newer and more reliable to load the cargo on truck. Hands over copy trucks to have very short turn-around times and oper­ of entry and supporting documents. CFA pays ate on a much more predictable schedule. Because sub- transporter 50 percent of agreed rate. contractors can only compete on prices, they need their 9. Transport loads cargo and proceeds to deliver. costs to be as low as possible. Using old trucks they can 10. Cargo is processed on both sides of Malaba/ buy cheaply is an effective way of minimizing fixed costs Busia border and weighed again. and thus an effective strategy to compete on low prices. 11. Cargo is delivered and container released to be returned to shipping line. 6.2 Determinants of Road Transport Costs 12. Transporter returns container to shipping line and Prices in East Africa and obtains Container Interchange to attach to the invoice for the CFA together with a copy of This section explains why transport prices are currently Delivery Order as proof of return of container. falling along the Northern Corridor, but not the Central Transporter receives rest of payment. Corridor. We do so first by explicating the process and cost 13. CFA raises invoice to client for Customs ($500), of moving a container from the port to its final destination, CFS ($350), processing ($500), and transport the prices importers pay, and truck operating costs. ($3,000). Box 4 shows the steps and current costs to move a hypo­ thetical 40-ft. container from a ship in Mombasa Port to a customer in Uganda. Table 20 presents a breakdown of the indica­ tive prices. If container deposit is removed from the total, transport by 9 percent. However, this is a fall in real prices. By con­ prices are two-thirds of the total, while customs, port, CFS, trast, prices have risen along the Central Corridor, confirm­ and inspection charges account for the balance. ing the divergence between them we examined in previous We now examine the determinants of transport prices. sections. Table 21 shows current transport prices along the Central Falling prices along the Northern Corridor are a posi­ and Northern Corridor to various East African desti­ nations. tive development. What is driving these prices down? Can According to the East African Business Council 2014 Logis­ we attribute it to any of the specific policy changes we dis­ tics Performance Indicator, the prices of transport along cuss in the chapter? To answer these questions, we must the Northern Corridor fell about 20 percent from 2011 to estab­ lish a direct link between the various interventions 2014. Rates fell for all markets expect Kampala, which rose and the variation in prices paid by the owners of the cargo. 140 Political economy of regional integration in sub-saharan africa TABLE 20: Indicative Costs for Importing 40-Foot those for an average truck in the fleet of a large operator Container into Kampala from Mombasa owning a range of trucks from financed new ones to fully- owned old ones. USD Table 22 breaks down these costs by component. Our Container Deposit* 4,500 data show that the round trip per kilometer rate based on Local Shipping Line Charges 377 a container with a gross weight of 27 tons from Mombasa CFS Handling 350 to Kampala is $1.35 per kilometer or $3,154 per container. Electronic Tracking Charges 10 Add to this rate a 25% profit margin and the price to the KPA Handling 165 client should be $1.68 per kilometer or $3,942 per con­ tainer. Assuming that this is a large fleet owner engaged in RE—Marshalling 150 return cargo contract and assuming that it gets $900 per Wharfage 105 container for return cargo from Kampala, the transporter Verification 100 would be able to charge as low as $3,000 per container for C & F Charges 500 the Mombasa to Kampala leg and still make a comfortable Transport** 3,000 margin. Total 9,257 Our simulated rate compares favorably with the rates * Refundable on safe return of container we obtained during our interviews and those we show ** With profit above. We found that for the large fleet owners, current average transport only rates from Mombasa to Kampala range between $2,500 and $3,050 for imports. One com­ We begin by looking at the cost components in a trans­ pany with a C & F Department is currently offering an all porter’s operations. The analysis is based on an imported, in flat rate (C&F plus transport) to Kampala for contract eight-year-old used Mercedes Benz Actros truck cost­ ing clients at $3,050 for 20-foot containers and $3,150 for $65,000 and a brand new local trailer costing $30,000. We 40-foot containers regardless of weight. For exports from assume the owner uses a bank loan to purchase the equip­ Kampala the flat all in contract rate is $1,250 per 20-foot ment at 16.5% interest per year on a reducing balance. We container, inclusive of customs and clearance fees. further assume that the truck covers 100,000 kilometers The data also allows us to examine costs by their per­ per year on twenty brand new tires.14 We allow for a 25% centage contribution. Direct costs account for a combined profit margin. The costs we derive would approximate 81% of the total operating cost of transport. The three top individual cost components are fuel at 38% followed by cost of truck and trailer at 19%, with tires in third position 14 This mileage is equivalent to one round trip from Mombasa at 10%. The crew cost, the indirect costs, and overhead to Kampala per week or two round trips between Mombasa and costs each contribute 9% of the total per kilometer cost of Nairobi per week. operating the truck. TABLE 21: Transport Prices Along the Central and Northern Corridors: 2011–2014 Bujumbura Goma Juba Kampala Kigali Nairobi From Dar 2011 4,400 3,600 N/A 2,500 3,300 N/A 2014 4,500 4,700 N/A 4,600 4,300 N/A Change 2% 31% N/A 84% 30% N/A From Mombasa 2011 8,000 9,500 9,800 3,400 6,500 1,300 2014 6,500 7,000 7,500 3,700 4,800 1,045 Change –19% –26% –23% 9% –26% –20% Chapter 6: Political Economy of Transport Sector Integration in the East African Community 141 TABLE 22: Composition of Current Total These cost components allow us to focus on why prices Operating Costs per Kilometer in East Africa can fall as travel times decline. The fixed costs of the truck, (Bank-Financed 8-Year-Old Truck) mainly loan repayments, are approximately $1,500 per month. As travel times have fallen in the region, an aggres­ Dollar Percent sive operator could double the number of trips to Kampala Cost Cost per month from two to four. This would allow an operator to Truck and Trailer $0.25 19% spread his or her fixed costs over four trips per month ($350 Fuel $0.51 38% per trip) instead of two ($750 per trip). They can also lower Repairs and Maintenance $0.08 6% their profit margins, but nevertheless earn more money by Tires $0.13 10% carrying a larger volume of cargo. These are two reasons Driver and crew $0.12 9% transport prices are currently falling in the region. Falling Indirect Cost (e.g., insurance) $0.12 9% prices due to increases in efficiency suggest the sector is very Overhead Cost (e.g., office staff) $0.12 9% competitive as Raballand and Teravaninthorn (2009) argue. Total $1.35 100% One negative impact of the fall in transport times is a large oversupply of trucks. Years of economic growth in Memo: $0.49 37% the EAC led to rising demand for trucks along the Central Fixed Cost and Northern Corridors. Slow port operations, poor road Variable Cost $0.84 63% conditions, and inefficient management systems, led most large fleet companies to keep more trucks and trailers in Components of Transport Costs Components of Transport Costs 2. Truck & Trailer: At US$. 0.20per km accounts for 7. OVERHEAD COST: These include salaries and 13% of all Operations cost administration. The average is cost is US$.0.10 per km which amounts to 6% 2 6 3 5 4. Tyres: At US$. 0.15per km accounts 4 1 for 9% of all Operations cost 5. Repairs & Maintenance: At US$. 0.32per km accounts for 20% of all Operations cost 3. Driver & Turn Boy 6. INDIRECT COST: Salaries are based fixed These include licenses, and millage allowance. permits, insurance, 1. FUEL: The largest Operating Cost is diesel. A At US$.0.20 per Km it monitoring and tracking truck uses on average 1100 liters on a round trip accounts for 13% of total cost. The average is cost from Mombasa to Kampala. Included in this is what operating cost is US$.0.15 per km which the Drivers siphon and sell. The average is cost is amounts to 9% US$.0.49 per km which amounts to 30% Source: Interviews with Transport Operators 142 Political economy of regional integration in sub-saharan africa their fleets than would otherwise be necessary in an effi­ Corridor. As a result, it is not surprising competition is cient environment. In addition, as transport rates shot much stronger along this route. up, many new firms ventured into the transport business. Between the year 2007 and 2010, for example, the num­ ber of Kenyan trucks grew from 42,654 trucks to 67,668, a 7. Conclusion 59 percent increase. The number of trucks in Tanzania and For many years the transport sector in the EAC was stuck Uganda increased a similar amount. in a sub-optimal equilibrium of poor road quality, slow Due to falling transport times, the number of trucks travel times, and high transport prices. Over the past few necessary to carry the region’s cargo is declining rapidly. years, the situation has improved dramatically. This study First, shorter travel times allow firms to operate more effi­ has examined the political economy factors that account cient fleets. In addition, because quicker travel times makes for this change. There is no question that transport sector investing in reliable trucks worthwhile, a number of transport integration in the EAC, led by governments and private sec­ operators are opting to buy new trucks and reduce their tor pressure, has led to a range of positive changes: reliance on sub-contractors. As a result, demand for sub- contracts is waning. Some sub-contractors have substan­ tial ■■ The Port of Mombasa has become much more efficient. scope for lowering their prices if they own their trucks, while ■■ The removal of NTBs over the last decade has had a others do not. It is unclear how the market will clear the significantly reduced transit time and increased com­ excess supply of trucks at the moment, although attri­ tion of petition among transporters. Key developments that the least efficient trucks is the most likely candidate. have helped to facilitate regional trade include the Finally, we can also explain why prices are falling much implementation of joint border committees, the single faster along the Northern Corridor than the Central one. customs territory, and reductions in the number of The main reasons are competition and infrastructure road blocks and weighbridges. improve­ ments. The efficiency improvements we have dis­ ■■ Road quality and compliance with weight limits has cussed above are far more evident in the former than the improved substantially. latter, and the Port of Dar es Salaam, in particular, is an increasing bottleneck. In addition, the traffic is far heavier ■■ Transport prices are falling, especially along the North­ along the Northern Corridor than the Central one. This is ern Corridor. evident from the data on regional transport volumes we showed earlier. Unfortunately, the latest data we have for Nevertheless, there are a number of challenges toward both countries is 2011, before many of the improvements greater integration and perhaps sustaining the current along the Northern Corridor occurred. Even then, how­ level of infrastructure: ever, close to 80 percent of the transit cargo in East Africa ■■ The region has massive infrastructure needs and (including DRC and South Sudan) was along the Northern limited financing for it. Chapter 6: Political Economy of Transport Sector Integration in the East African Community 143 ■■ Traffic congestion at the ports and major towns along References the corridors makes travel much slower than it needs to be. Byiers, Bruce, Jan Vanheukelom, and Quentin de Roquefeuil. 2013. Arguing a Political Economy Approach to Regional Inte- ■■ Slow expansion of Dar es Salaam port threatens to mar­ gration. Manuscript. ginalize the Central Corridor as an attractive transport Cowles, Maria Green. 1995. “Setting the Agenda for a New route and hence reduce corridor competition. Europe.” Journal of Common Market Studies. 33(4): 501–526. ■■ Railways are still problematic. RVR is operating far Fitzmaurice, Mike and Olivier Hartmann. 2013. Border Cross- below estimates, the Standard Gauge railway is mired ing Monitoring along the Northern Corridor. Washington, in controversy, and Tanzania Railways is undergoing a DC: The World Bank/sub-Saharan Africa Transport Policy difficult restructuring. Program. Hartmann, Olivier and Ephrem Asebe. 2013. Road Transport in ■■ The EAC remains institutionally weak and is unable to East Africa. Washington, DC: The World Bank/sub-Saharan coordinate regional infrastructure investment plans Africa Transport Policy Program. and enforce integration. It seems unlikely to gain these Mattli, Walter. 1999. The Logic of Regional Integration. New York: capacities in the near future. Cambridge University Press. McAuliffe, Catherine, Sweta Saxena, and Masafumi Yabara. The chapter’s findings align with the broader litera­ 2012. “Sustaining Growth in the East African Community,” ture on transport economics and the political economy of in Davoodi (ed.), The East African Community After Ten Years. regional integration. The study supports results from the Arusha, Tanzania: The East African Community. Preston, John. 2012. Integration for Seamless Transport. Interna­ former that competition and efficient movement of goods tional Transport Forum Discussion Paper 2012-01. Paris: are necessary for high road quality to bring down trans­ Organization for Economic Cooperation and Development, port prices. In addition, consistent with the broader aca­ Raballand, Gael and Supee Teravaninthorn. 2009. Transport demic literature on regional integration, it also finds that Prices and Costs in Africa. Washington, DC: The World Bank. strong private sector pressure and leadership from a pow­ United States Agency for International Development/ erful state account for these changes. COMPETE. 2013. Joint Border Committees: A look at Malaba We also provide clear recommendations for the Bank’s Border. Nairobi: USAID. work in regional integration in Africa. In particular it pro­ Venables, Antony. 2003. “Winners and Losers from Regional Inte­ vides three actionable suggestions: gration Agreements.” Economic Journal. 113(49): 747–761. Venables, Antony and Paul Collier. 2008. Trade and Economic ■■ Engage the private sector to determine its preferences Performance. Paper delivered at Annual Bank Conference and willingness to pressure governments to implement on Development Economics. polices necessary to achieve them. World Bank. 1955. Appraisal of the East African Railways and ■■ Jointly work with relevant private sector organizations Harbors Administration Development Program. Washington, and government agencies on developing consensus to DC: The World Bank. address challenges. ■■ Accept solutions that can gain consensus even if they are far from optimal. 144 Political economy of regional integration in sub-saharan africa Appendix: Transport Sector Stakeholders Major Stake Holders Sphere of Influence and Impact East African Community Drive the integration process. Country Line Ministries Articulate country interests in the integration Country Revenue authorities Monitor and enforce legislation on revenue collection and management in the region. Can streamline customs processes to reduce administrative costs for transporters while enhancing revenue collection. Country Roads Authorities Create road infrastructure development strategies and monitor implementation. Protect and rehabilitate the existing infrastructure. Country Ports Authorities Promote development of regional ports with their country spheres to facilitate trade Country Maritime Authorities Ensure sustainable safe, secure, clean, and efficient water transport for the benefit of stakeholders through effective regulation, coordination, and oversight of maritime affairs. Country Railway Authorities Promote, facilitate, and participate in regional, national, and metropolitan railway network development. Country Airport Authorities Facilitate infrastructure development for aviation services within the region and internationally. Development Partners Promote bilateral engagement on the development of transport infrastructure to enhance trade and integration in the region. Country Business Councils Provide a regional platform through which the business community can present their concerns at the EAC policy level, with the overall aim of creating a more conducive business environment through targeted policy reforms. Country Shippers Councils Provide a platform for cargo owners to articulate their concerns and demands to service providers and policy makers. Advocate for enactment of appropriate legal and regulatory framework. Country Transporters Associations Represent advice and support road transporters in the East African Region. Advocate for a safe, reliable, efficient, professional, and environmentally friendly road freight industry. Country Freight Forwarders Associations Professionalizing the freight forwarding industry, providing information, and advocacy for an effective freight logistics industry in the East African region. EAC Transport Sector Stakeholders Central Corridor Transit Transport Intergovernmental Standing Commit­ Tanzania Airports Authority Facilitation Agency tee on Shipping (ISCOS) Tanzania Maritime Authority Customs Authorities Kenya Airports Authority Tanzania Ports Authority Development partners (World Bank, Kenya Maritime Authority Tanzania Railways Authority USAID, TMEA, JICA, EU, AfDB) Kenya National Highways Authority Tanzania Roads Authority (TANROADS) East Africa Drivers Association Kenya Ports Authority Tanzania Zambia Railway Authority East African Business Council Kenya Railways Corporation Uganda Airports Authority East African Community Kenya Rural Roads Authority Uganda National Roads Authority East African Shippers councils Kenya Urban Roads Authority Uganda Ports Authority East African Transporters Association Kenyan Roads Board Uganda Railways Authority Federation of East African Freight for­ National Traffic Police Authorities warders Association Various line ministries (e.g., Trade, Northern Corridor Transit Transport tourism, and industries) Coordination Authority Regional integration in sub-Saharan Africa is crucial for its further economic development and, more importantly, its structural transformation away from agriculture towards higher value-added activities, such as manufacturing and services. Yet there are many paths towards greater integration, some of which are easier than others. In addition, integration need not follow a linear path or occur mainly through formal inter-governmental economic coordination. In order to gain insights into how regional integration is occurring in sub-Saharan Africa, determine impediments to it, and develop recommendations to further facilitate it, this volume examines the political economy of regional integration in sub-Saharan Africa. In a comparative context, the findings suggest cautious optimism for regional integration efforts in sub- Saharan Africa. They also question perceptions that regional integration in sub-Saharan Africa is doomed to be less successful than in other parts of the world. Economic integration is typically difficult, especially among less developed economies. In addition, failed integration attempts and slow implementation of integration policies is a global pattern, not only an African one. Yet integration is occurring in sub- Saharan Africa, despite these obstacles. This volume demonstrates that regional integration is more likely to succeed when it has strong support among governments and/or the private sector as well as when key actors take a pragmatic and flexible path to integration rather than a rigid and all-encompassing one. Similarly, it shows that economic integration is more likely to succeed when it occurs alongside regional attempts at improving political stability and/or developing joint infrastructure. Arguably, regional integration in sub-Saharan Africa is perhaps somewhat more successful than one would predict given the challenging environment in which it is occurring.