Policy Reforms Needed to Boost Regional Trade and Investment

South African Institute for International Affairs (Johannesburg)

2 June 2011

press release

Pretoria — New World Bank research shows that a combination of policy  barriers are hampering regional trade in both goods and services among Southern African countries, and calls for a new generation of policy reforms to realize “Factory Southern Africa” for securing economic growth, creating jobs, reducing skills gaps and promoting keener competitiveness.

The results show that regional trade in Southern Africa lags behind other regions, and accounts for just 10 percent of total trade.  Comparator figures are 60 percent for Europe, 40 percent for North America, and 30 percent for Asia. Most importantly, regional trade in parts and components is among the lowest in the world, confirming the absence of regional supply chains. Greater regional integration — easing of barriers, investing in quality infrastructure, and diversifying away from primary commodities to higher, value-added manufacturing and services — can help to unleash the economic potential of the sub-region.

“As these countries look for innovative ways to counter the economic slowdown, not enough attention has been paid to the growth-boosting effects of regional trade,” said Ruth Kagia, World Bank Country Director for South Africa.  “These new findings provide empirical evidence that reforms to increase trade can deliver needed development dividends in the form of faster economic growth, more job creation opportunities, and more linked markets.”

Select findings include:

• Southern African countries successfully increased trade with the rest of the world, from US$50 billion in 2000 to over $153 billion in 2008, but regional trade contributed relatively little to this growth
• Southern African Development Community (SADC) exports to the world rose from 20 to over 30 percent of combined GDP over the past decade, but regional trade only accounted for 3 percent
• Regional trade in services remains underdeveloped. Professional services are a small, but growing and significant, sector that is important to industries including mining, manufacturing and services. They can aid growth through such benefits as higher productivity, lower transaction costs and better production processes.

The World Bank study found that presently these services make a “meager” contribution in Southern Africa. There are relatively few professionals and the region is facing a “middle-level skills vacuum” – for example regarding accounting and engineering technicians or paralegals – and a broad mismatch of skills and needs.  Regional integration has helped in the lowering of tariff barriers (nearly 85 percent of intra-SADC trade is now duty free, a number that rises to 98 percent in the Southern African Customs Union (SACU) countries) but other trade barriers persist: inefficient transport, poor border management and logistics, cumbersome fiscal arrangements, poorly-designed regulations and standards, and non-tariff barriers such as import bans, permits and licensing procedures.

The head of the Economic Diplomacy Programme at the South African Institute of International Affairs, Catherine Grant-Makokera pointed out that the report focused on the practicalities of regional integration.

“While many regional bodies and organisations focus on the theoretical approach to regional integration, the World Bank report emphasises the practical challenges and possibilities for improving implementation of regional goals. Trade cannot be separated from other policy issues including investment, industrialization and migration – they must be considered together”, Grant-Makokera said.

Non-tariff barriers (NTB) such as import bans, quotas and levies reported by firms in SADC affect one-fifth of recorded regional trade (US$3 billion). This ignores those impacts of barriers that prohibit trade entirely as well as costs related to inefficiencies in transport, logistics and customs which affect all goods trade.

“Intra-regional trade offers tremendous potential and a slew of bold reforms, many of which can be undertaken nationally, are needed to secure development dividends,” said Ian Gillson, World Bank Senior Trade Economist and research team leader.  “In conducting this research, our focus was on providing policymakers with practical and implementable policy recommendations that would help unleash the potential that greater trade offers for faster, broad-based economic growth and increased jobs and livelihood opportunities.”

Factors impeding competitiveness was a key theme of the research which includes evidence from traders on the barriers they were facing.  For example:

• Shoprite, a grocery chain, loses $ 500 per day for every grocery-laden truck that is held up at a border thereby slowing deliveries; the chain spends $6 million annually administering overly complex ‘certificates of origin’ to secure $14 million in duty savings under the SADC Trade Protocol
• Differences in Value-Added Tax (VAT) systems applied to intra-SACU trade necessitate border controls and cost up to 2 percent of the value of each transaction
• Export restrictions on Namibia’s exports of small stock reduce the ability of farmers to benefit from higher prices in the South African market

The research findings were discussed at a “Development Dialogue” organized by the World Bank jointly with the South African Institute of International Affairs (SAIIA).

“Sharing knowledge is a central element of the World Bank’s strategy for the Africa region,” said Marco Scuriatti, World Bank Senior Operations Officer based in Pretoria.  “The research results discussed today will help contribute evidence to the public debate on the role of trade in achieving sustainable development.”

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