Regional integration in sub-Saharan Africa will contribute to growth, but not without risk

International trade discussions are currently dominated by the threat of trade wars, but the African continent is heading in the opposite direction. After two years of negotiations, representatives from a large number of African countries signed the African Continental Free Trade Agreement in Kigali on March 21, 2018 at an extraordinary summit of the United States. African Union. Is this agreement an attempt to solve a disastrous and stagnant economic integration, or is it part of a rapid and regular regional integration?

Our recent work suggests that it is the last in looking at the many links that are developing in sub-Saharan Africa. We document that the subcontinent is much more integrated today than in the past. This may surprise more than one, but the level of integration in Sub-Saharan Africa is actually comparable to that of other developing and emerging market economies around the world.

Closer economic relations between countries are a sign of welcome development and a promising engine for future growth, but they are also problematic. Increased interconnection can expose countries to good or bad fortune from each other.

On the positive side, closer economic ties between countries favor the spillovers of growth when large, fast-growing economies drive others. On the negative side, greater interconnection can expose small economies to the recession of their partners. The facts bear witness to this: after nearly two decades of strong economic activity, sub-Saharan Africa experienced the setback of integration in 2015. The collapse of commodity prices and the slowdown in Economic activity in Nigeria and South Africa, the largest economies in the region, contributed to the slowdown in growth in sub-Saharan Africa, which reached its lowest level in more than 20 years.

But circumstances are changing and since 2017, growth has begun to recover, benefiting from a more favorable external environment. The recovery, however, is mixed and it is unclear to what extent the slow recovery of large economies still affects the rest of sub-Saharan Africa. Beyond the ongoing recovery, Sub-Saharan African countries can capitalize on the benefits of regional linkages while minimizing risks.

Role of trade

Integration across sub-Saharan Africa has been particularly marked by trade, and its intensity has steadily increased: since the 1980s, the share of regional exports in total exports has more than tripled. Sub-Saharan Africa now has the highest share of intra-regional trade integration among the emerging and developing economies of the world, followed by the Middle East and North Africa and emerging and developing Asia.

This growing integration in recent decades is the result of the region's stronger economic growth relative to the world, its tariff cuts and the strengthening of its institutions and policies. Although management has been favorable over time compared to advanced economies, intra-regional trade remains relatively weak and the business climate remains difficult.

Growth has supported the growing integration of sub-Saharan Africa, but the integration itself has also translated into significant spinoffs of growth: our work reveals that 39, on average, an increase of 5 percentage points in the growth rate of intra-regional partners, weighted according to exports, is about 0.5%. increased growth of a typical country of sub-Saharan Africa. Interestingly, and in line with the region's comparable shares in intraregional trade, the spillovers from the commercial channels appear to be similar to those of other emerging and developing economies.

However, optimism regarding the integration of Sub-Saharan Africa is subject to significant reservations, most of which indicate that the continent still has a long way to go to achieve complete integration.

Today, intraregional trade is highly concentrated. Ten sub-Saharan countries account for 65% of the total regional demand for intraregional exports and, as a destination market for most intraregional trade, they have the potential to generate the largest regional spin-offs. These include major economies such as South Africa and its neighboring countries, Côte d'Ivoire and the Democratic Republic of Congo, but surprisingly exclude other economies such as Angola and Nigeria, which import mainly from the rest of the world.

There are other small areas of intensive intraregional integration throughout the continent, although import shares are relatively small compared to major players and total intraregional exports from sub-Saharan Africa. Countries with high intraregional integration tend to be smaller and import a significant share of their neighbors' GDP and can therefore be a substantial source of subregional spillovers. This is particularly true in the case of West African countries such as Burkina Faso, Ghana, and Mali, which are important destination markets for exports, accounting for more than 1 % of GDP for some of their trading partners.

A closer look at the geographical distribution of trade in sub-Saharan Africa reveals a significant subregional concentration. Trade within the Southern African Customs Union (SACU) alone accounts for half of total intra-regional trade in sub-Saharan Africa. In addition, for the Southern African Development Community (SADC), the East African Community (EAC) and SACU, trade within these regions accounts for more than 70% of intra-regional trade in Africa. their member countries. In the regions of the Central African Economic and Monetary Community (CEMAC) and the West African Economic and Monetary Union (WAEMU), intra-regional trade accounts for about 50% of their intra-regional trade. In absolute terms, SADC and SACU account for more than 70% and 50% respectively of total trade in sub-Saharan Africa.

The prevalence of trade among neighbors in sub-Saharan Africa can be explained by the fact that bilateral trade is constrained by distance and socio-cultural differences – that trade becomes more and more difficult as we are moving away from the sub-region of the country. In fact, while a global phenomenon, these barriers are even more prevalent in sub-Saharan Africa than in the rest of the world. It is therefore not surprising that increased trade among neighbors has been an important driver of trade growth in the region. About half of the growth in regional trade between 1980 and 2016 comes from this type of commercial integration – a particularly strong result in the EAC and SADC.

The overall integration model reflects not only geographical proximity, but also infrastructure constraints and the impact of regional trade agreements and the reduction of non-tariff barriers in the subregions. Since it is underdeveloped, trade between subregions offers the greatest potential for integration. In this regard, the African Continental Free Trade Agreement, signed by countries across the continent, could trigger a new and deeper wave of integration.

Another important reason for intraregional integration in sub-Saharan Africa is the endowment of natural resources. It turns out that the weight of exhaustible natural resources of a country in the economy strongly affects the structure of its exchanges.

Resource-intensive countries are highly exposed to regional demand: intra-regional exports account for 7% of GDP, or 30% of total exports, on average. Countries that do not consume large amounts of oil have similar patterns, but to a lesser extent.

Oil exporters, by contrast, are different. And the difference is spectacular: exports from oil-producing countries to the rest of the world represent on average 25% of GDP, while intraregional exports represent only 1.5%. These countries are thus sheltered from regional spin-offs but are more exposed to global spillovers.

Complex factors at play

Commercial integration does not develop in isolation. Engines similar to those that support and strengthen intraregional trade also strengthen intraregional financial links. Banks headquartered in sub-Saharan Africa have strengthened their regional financial ties since 2007 as European and US banks left the region as a result of the global financial crisis. Ongoing financial and technological development also means that remittances in the region are cheaper and have increased regional fund flows. In some countries, this can be a significant part of GDP.

Fiscal policy decisions can have cross-border effects on prices and investments in countries where trade is free or in the presence of porous borders. Like trade, these additional channels of contagion are strengthening, but they are still manifesting mainly at the sub-regional level today.

In the medium term, greater integration of these different sectors means a broader market for businesses, financial institutions and exporters to create new relationships with customers across borders. It also means that financial institutions will have more opportunities to provide services to financially disadvantaged and excluded people, and expatriate workers to provide for their loved ones at home through remittances.

Sub-Saharan Africa is still a continent with enormous potential. Since much of its integration has so far been sub-regional, deeper integration is possible. The recent continental African free trade agreement, if implemented vigorously, should further accelerate this trend.

However, the prospect of economic shocks should prompt policymakers to redouble their efforts to cope with the risks of spillover. Structural transformation strategies are needed to promote diversification and avoid the fallout of being too dependent on too few products and partners. More in-depth trade networks, as advocated by the African Continental Free Trade Agreement, are an encouraging development as they can help countries to market more products with more diverse partners. Governments should put in place precautionary mechanisms, monitor and regulate cross-border links – for example in the banking and financial sectors – to pave the way for growth and stability.

Francisco Arizala is an economist in the Africa Department of the IMF; Matthieu Bellon is an economist in the IMF's Fiscal Affairs Department; and Margaux Macdonald is an economist in the IMF's studies department. This article was originally published in Finance and development, IMF quarterly magazine.