Understanding Regional Integration in Sub-Saharan Africa
In recent times, the trade and investment potential of sub-Saharan Africa (SSA) has been well-documented with many investors from emerging markets now tapping into the opportunity. But many Western investors are still undecided about its growth and return on investment prospects.
Factors that influence investor’s decision regarding market attractiveness, particularly for the manufacturing and consumer sectors, include market size and market integration network for scale economies. Investors would most likely be interested in an integrated regional market that can be leveraged to link global supply chains.
They are looking at the peculiarities of SSA geography in terms of landscape and the economy—a highly fragmented continent with over 40 percent of the countries having population of less than 10 million. Fifteen out of 49 countries are landlocked and when considered individually most African countries have small economies. Adopting a regional strategy is essential and crucial to success.
There is notable progress in the ongoing regional market integration process across SSA. Trade and investment facilitation and harmonization of regulatory frameworks are being prioritized in order to attract foreign direct investment, unlock intra-regional trade, and capture the gains of increased market openness.
Some of the main regional integration vehicles in SSA are: Common Market for Eastern and Southern Africa (COMESA), East African Community (EAC), Economic Community of Central African States (ECCAS), Economic Community of West African States (ECOWAS) and the Southern African Development Community (SADC).
The EAC is a common market of six partner states (Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda) with a market size of approximately 173 million people. It is a strategic regional economic bloc in East Africa aggressively advancing towards integration of all factors of production—capital, labor, goods and services. EAC is a leading regional integration institution in SSA with members jointly executing infrastructural projects in road and rail network.
The Southern African Development Community (SADC) is a regional economic community covering the southern part of Africa. It is a free trade area comprising 15 member states with population of 277 million people. SADC has also been successful in implementing a number of trade faciliating reforms as demonstrated by a 24-hour e-settlement system of financial transactions within the community. While EAC and SADC are independent intergovernmental organizations currently at different levels of integration, COMESA is pursuing an expanded integration agenda for a COMESA-EAC-SADC single free trade area and a merger of the three organizations.
This impressive tripartite initiative, when operational, would involve 26 countries with a combined population of more than 600 million people and a gross domestic product of over $1 trillion. Its main objective is to evolve into a single integrated market in order to create greater scale and scope for investment and make the environment friendly for private sector development.
ECOWAS is a 15-member regional institution promoting economic integration and political cooperation for West African states. Despite trade integration within the bloc moving at relatively slow pace, it has great potential with market size of over 350 million people, about the size of the U.S market. ECOWAS is progressing in its regional economic cooperation to achieve a single large trading area.
Another prominent regional integration structure is the Economic Community of Central African States (ECCAS) which focuses on promoting economic cooperation among its ten member countries in Central Africa with the aim of maintaining economic stability and raising the standard of living of its 121 million population.
The SSA market is diverse, and understanding the cultural and regulatory framework within each of the 49 countries may be unrealistic. A strong recommendation to investors in managing this high level of diversity is to consider using a regional model approach.
The market integration efforts in the region have delivered improvements in harmonizing policies, reducing border delays, reforming customs procedures and consolidating small economies in order to achieve the utmost goal of growing intra-regional and extra-regional trade and increase Africa’s attractiveness for foreign investment.
Many countries are competing to be the gateway to Africa, although prominent regional hubs for multinationals in SSA are Kenya and Ethiopia for East Africa, South Africa for Southern Africa, and Nigeria and Ghana for West Africa. However, investors looking at this continent need to analytically select a point of entry that has the infrastructure and skill to support the business. It is possible to do business profitably in sub-Saharan Africa.
Kemi Arosanyin is a trade development specialist for Africa.