A partnership with academia

Building knowledge for trade and development

Vi Digital Library - Text Preview

Regional Integration, Growth and Concentration

Working paper by Dirk Willem Te Velde/ODI, 2007

Download original document (English)

This study aims to examine the circumstances under which different types of regional integration leads to convergence and growth, and how such integration could best be fostered. It will cover regions across the world, but the empirics will focus on developing country regions and Africa in particular.


Reshaping Economic Geography













BACKGROUND PAPER








REGIONAL INTEGRATION, GROWTH AND


CONCENTRATION








DIRK WILLEM TE VELDE
ODI








Current version: December 5, 2007








Regional integration, growth and concentration1








Background information
5 December 2007




















Overseas Development Institute
111 Westminster Bridge Road


London SE1 7JD, United Kingdom
Tel.: +44 (0)20 7922 0300 Fax: +44 (0)20 7922 0399



www.odi.org.uk








1 The study is for the World Bank and is led by Dr Dirk Willem te Velde (dw.tevelde@odi.org.uk). He is


grateful to Steven Thompson for research assistance.




Table of contents

Table of contents................................................................................................................. 1

1 Introduction................................................................................................................. 2

2 Coverage of regions .................................................................................................... 2

3 Economic performance of regions: summary ............................................................. 5

4 Implementation of the Common External Tariff in African Custom Unions............. 7

5 Convergence and divergence in developing country regions: summary of reviewed
studies. .............................................................................................................................. 11

6 Further steps in the research ..................................................................................... 12

Appendices........................................................................................................................ 13
Appendix A Intra-regional exports and imports ............................................................... 14
Appendix B FDI flows and stock as % of developing country total, by region ............... 20
Appendix C GDP Per Capita by members of a region ..................................................... 26
Appendix D FDI and trade as % of GDP.......................................................................... 32
Appendix E Common external tariffs in African Custom Unions, by Country, on the basis
of WTO Trade Policy Reviews 1998-2007 ...................................................................... 44
Appendix F Summary of Convergence/Divergence Research ......................................... 52
Appendix G Summary of Africa Specific Research- Convergence/Divergence Continued
........................................................................................................................................... 56


1




1 Introduction

This study aims to examine the circumstances under which different types of regional integration
leads to convergence and growth, and how such integration could best be fostered. It will cover
regions across the world, but the empirics will focus on developing country regions and Africa in
particular.

This paper provides background information for the study which focuses on the following
aspects:

• Consider representative regions in Africa and other developing country regions and review


their achievements in terms of income levels, trade, FDI and regional cooperation (intra and
extra-regional);


• Examine whether regions experience higher/lower inter-country disparities in living standards
(divergence or convergence);


• Review the implementation of the common external tariff (CET), especially in the context of
the African customs unions; and


• Examine whether certain types of regions lead to better outcomes in terms of growth and
convergence



This background paper is structured as follows. Section 2 introduces the regions covered in this
research. Section 3 describes the performance of regions on the basis of a number of variables.
Section 4 discusses issues surrounding the implementation of the CET. Section 5 summarises key
issues and findings in the debate on convergence and divergence in regions. Section 6 suggests
the next steps in this research.


2 Coverage of regions

Which RTAs will be included?

In Africa we include:
EAC: Kenya, Tanzania, Uganda (Burundi and Rwanda joined in 2007)
CEMAC: Cameroon, Gabon, Central African Republic, Chad, Equatorial Guinea, Congo, Rep.
WAEMU: Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal,Togo
COMESA: Angola, Burundi, Comoros, Congo, Dem Rep, Djibouti, Egypt, Ethiopia, Kenya,
Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Uganda, Zambia,
Zimbabwe
SADC: Botswana, Lesotho, Namibia, South Africa, Swaziland, Angola, Malawi, Mozambique,
Tanzania, Zambia, Zimbabwe, Mauritius, Congo, Dem Rep, Madagascar, Seychelles
SACU: Botswana, Lesotho, Namibia, South Africa, Swaziland.

In Latin America:
MERCOSUR: Brazil, Argentina, Uruguay, Paraguay
CARICOM: Bahamas, Belize, Barbados, Jamaica, Guyana, Saint Vincent and the Grenadines,
Saint Lucia, Saint Kitts and Nevis, Grenada, Dominica, Trinidad and Tobago, Suriname, Haiti,
Grenada, Dominica, Montserrat.
NAFTA: United States, Mexico, Canada
ANDEAN: Bolivia, Columbia, Ecuador, Peru,


2




In Asia:
ASEAN: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore,
Thailand, Vietnam
SAARC: Afghanistan, Bangladesh, India, Maldives, Nepal, Pakistan, Sri Lanka

And in Europe (we use the EU15 for analysis, but there are now 27 members):
EU(15): Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy,
Luxembourg, Netherlands, Portugal, Spain, Sweden, United Kingdom

Developing country customs unions:

Africa
EAC: Kenya, Tanzania, Uganda (Burundi and Rwanda joined in 2007)
CEMAC: Cameroon, Gabon, Central African Republic, Chad, Equatorial Guinea, Congo, Rep.
WAEMU: Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal,Togo
SACU: Botswana (not in CU), Lesotho, Namibia, South Africa, Swaziland.

Other:
MERCOSUR: Brazil, Argentina, Uruguay, Paraguay
CARICOM: Bahamas, Belize, Barbados, Jamaica, Guyana, Saint Vincent and the Grenadines,
Saint Lucia, Saint Kitts and Nevis, Grenada, Dominica, Trinidad and Tobago, Suriname, Haiti,
Grenada, Dominica, Montserrat.
ANDEAN: Bolivia, Columbia, Ecuador, Peru.
GCC Cooperation Council of Arab States for the Gulf): Baharain, Saudi Arabia, Oman,
Kuwait, Qatar , UAE.
CACM: Guatamala, El Salvador, Honduras, Nicaragua

How do regions differ?

Regions differ. In fact no region is the same. In the course of this research we will aim to
differentiate amongst regions, e.g. in the way they have implemented a common external tariff or
a compensation mechanism to share revenues. This allows us to test for the effects of different
forms and functions of regions on growth and convergence.

Te Velde (2007) compares trade and investment provisions across seven main regions, as well as
for each region over time including investment rules (scope and coverage; national treatment;
most favoured nation and fair and equitable treatment; performance requirements; transfers of
funds; provisions with respect to expropriation; settlement of disputes) and trade rules (rules of
origin; tariff structures; other provisions).

Generally, regions differ with respect to trade and investment provisions in two fundamental
respects:


• Over time, when regions change or add investment-related provisions;
• Across regions, when investment-related provisions differ between regions at one point in


time

As an example, table 1 measures trade and investment provisions for the 7 most advanced regions
in the developing world regarding the inclusion of trade and investment provisions. The
Investment Index captures provisions on trade and investment rules in RTAs and the extent of
investment provisions. The Trade Index covers trade rules in RTAs such as MFN tariff status.
The following keys were used:


3





Investment Index = 0 if not member of group
= 1 if some investment provisions in region (as in COMESA, SADC),
= 2 if advanced investment provisions in region (e.g. improved investor protection in ASEAN)
= 3 if complete investment provisions in region (e.g. Chapter XI of NAFTA)
= -1 if more restrictive provisions (restrictions on foreign investors in ANDEAN in 70s)

Trade Index = 0 if not member of group
= 1 if some trade provisions (e.g. tariff preferences),
= 2 if low MFN tariffs, (close to) zero intra-reg tariffs
= 3 if high MFN tariffs , (close to) zero intra-reg tariffs

A higher value of the index should lead to further (extra-regional) FDI.


Table 1 Regional Integration Index




Investment provisions



Trade provisions


RTA (date of
establishment) 1970s 1980s 1990s 1970s 1980s 1990s


NAFTA (1994)


0 0 3 (1994) 0 0 2 (1994)
MERCOSUR (1991) 0 0 2 (1994) 0 0 3 (1991)
CARICOM (1973) 0 1 (1982) 2 (1997) 1 (1973) 2 3 (1997)


ANDEAN (1969)
-1(1970)


1 (1987) 2 (1991) 1 1 2 (1993)
ASEAN 0 1 (1987) 2 (1996), 3 (1998) 1 1 1
SADC (1992) 0 0 1 (1992) 0 0 1 (1992)
COMESA (1994) 0 0 1 (1994) 0 0 1 (1994)
Source: Measurement of provisions described in Te Velde and Fahnbulleh (2007); years between
parentheses indicate when certain provisions were announced.

Te Velde and Bezemer (2006) estimate a model for the real stock of UK and US FDI in
developing countries during 1980-2000 and find that membership of a region as such is not
significantly related to inward FDI, but crucially, when a country is a member of a region with a
sufficient number and level of the trade and investment provisions (e.g. describing treatment of
foreign firms, large trade preferences), this will help to attract more inward FDI to the region.

Important for the debate on convergence and divergence within regions, they find that the relative
size of a country’s economy within a region matters for attracting additional FDI, as does a
central location in relation to the largest market. Countries that have larger economies or are
geographically closer to other, larger countries within the region can expect a larger increase in
FDI as a result of joining than those of countries that have smaller economies or are located in the
periphery.

In our future research we can introduce new provisions based on types of policies and test
whether these provisions affect incomes and converges of member states of a region.


4




3 Economic performance of regions: summary


The appendices describe performance in regions in more detail. Table 2 provides a summary.
Low-income regions have a low share of intra-regional trade, although this could still be
important because total trade can be higher in African compared to other regions. The FDI stock
to GDP ratios vary considerably by region.


Table 2 Summary of key characteristics of regions


Members
(considered,
in 2006)


CU Intra-
regional
trade
(2006)


GDP
(bn
USD,
2006)


Export/
GDP
(2006)


FDI stock/
GDP
(2006)


EAC 3 Operational
from 2005


12.8 43..3 22.7 22.3


CEMAC 5 UDEAC
1999 CET


1.9 44.5 51.5 48.3


WAEMU 8 Since 2000 10.7 49.4 30.1 14.3
COMESA 20 Aim by


2008
4.0 331 28.1 25.1


SADC 15 7.7 380 33.7 29.8
SACU 5 New CET


agreed by
2002


276 31.1 29.8



MERCOSUR 4 Yes 16.2 2160 10.0 15.7
CARICOM 15 Yes 9.6 62.7 33.9 52.6
NAFTA 3 No 43.8 15300 13.1 15.7
ANDEAN 4 Yes 9.6 281 25.1 30.3

ASEAN 10 No 24.1 1040 86.5 40.4
SAARC 7 No 5.4 1140 19.8 6.4


Table 2 provides a summary of recent developments (over the past decade), which can be seen in
more details in the charts of the appendices. Trade as a per cent of GDP has risen for almost all
regions over the past decade, except in NAFTA and WAEMU. The stock of FDI as per cent of
GDP also increased in all regions over the same period except WAEMU.

Two types of convergence are normally tested in empirical research.


• β convergence is tested for to determine whether or not poor countries are growing faster
than richer countries (a negative correlation between initial per capita income and growth
in per capita income);


• σ convergence tests whether or not the dispersion between per capita income levels
declines over time.



Chart 1 shows sigma convergence of regions under consideration. On this measure, only the
incomes of members of EAC and ASEAN have converged over the past decade although over the
longer-run WAEMU and SACU have also converged somewhat..


5




Chart 1 Sigma convergence, by region


0


0.1


0.2


0.3


0.4


0.5


0.6


0.7


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


CARICOM


EAC


ANDEAN


SAFTA


WEAMU


MERCOSUR


SACU


COMESA


CEMAC


ASEAN


SADC






Table 2 Development of economic performance of regions over time (last decade)

Convergence


(sigma)
(1997-2006)


Did
export/GDP


increase
(1997-2006)


Did FDI
stock
/GDP


increase
(1997-
2006)


Did intra-
regional


trade
increase


Did regional FDI
as % of


developing
country FDI


increase?
(1997-2006)


EAC √ √ √ - √
CEMAC - √ √ - √
WAEMU - - - √ -
COMESA - √ √ - √
SADC - √ √ √
SACU - √ √ √

MERCOSUR - √ √ - -
CARICOM - √ √ - √
NAFTA - - √ √ na
ANDEAN - √ √ - -

ASEAN √ √ √ √ -
SAARC - √ √ √ √


6




4 Implementation of the Common External Tariff in African
Custom Unions

Regional trade agreements can be defined as intergovernmental agreements that manage and
promote trade activities in specific regions of the world. The World Trade Organization (WTO)
takes stock of regional trade agreements (RTAs) in relation to their trade components. RTAs vary
greatly in size and often go beyond ‘tariff-cutting exercises.’ Many developing countries view
RTAs as a means to strengthen economic growth, but the WTO warns these agreements can
depart from the MFN (Most Favoured Nation) principle, a key component of multilateral
trading.2 They also explain that distortions in resource allocation along with trade and investment
diversion can undercut potential benefits of joining.2 Despite these concerns, developing
countries seek regional stability and quality of life improvements through increased inter and intra
regional trade activity.

There are several stages of regional economic integration, ranging from the formation of a trade
bloc to the establishment of an economic and monetary union. One important step in the
integration process is the formation of a customs union which not only eliminates tariffs and
quotas on trade between member countries, but also establishes a common external tariff applying
to non-members. In Africa, the four major customs unions are divided by region and include the
East African Community (EAC), the Economic and Monetary Community of Central Africa
(CEMAC), the South African Customs Union (SACU), and the West African Economic and
Monetary Union (WAEMU). Just under half of Africa’s fifty three nations are members of a
customs union, making these partnerships an important part of the economic and political
landscape. The members in WAEMU and in CEMAC share a common currency, and were
formed after the devaluation of the CFA franc in 1994. The South African Customs Union is the
oldest group dating back to 1910, although it has been altered under revision agreements in 1969
and 1994.3 The latest customs union to form is the EAC on 2002 after the collapse of a similar
group in 1977.4

WAEMU

When forming a customs union, countries must establish a common external tariff (CET), a tariff
which applies to all imports entering the union area. The eight French speaking countries of
WAEMU have had a CET since 2000 and are classified as a full customs union by the Economic
Commission of Africa, unlike the other economic partnership in the region (ECOWAS), which
has experienced difficulties establishing a CET.7 The WAEMU has taken further steps towards
regional integration in 1999 with the creation of the Pact of Convergence, Stability, Growth, and
Solidarity, which includes macro-economic convergence criteria.5

The CET can act as a compensation mechanism, especially in WAEMU where it can affect how
much is transferred from poor to rich countries. Some suggest setting the CET at the level of the
country with the lowest initial tariff because there will be no incentive for inefficient producers to

2 WTO website on ‘Regional Integration- The Scope of RIA’s’
http://www.wto.org/english/tratop_e/region_e/scope_rta_e.htm
3 The New Southern African Customs Union Agreement By Robert Kirk and Matthew Stern
Blackwell Publishing Ltd Oxford; The World Economy 28 (2), 169–190
4 Integration Experience of East African Countries Presentation by Andrew Mullei, Governor of the Central
Bank of Kenya May 17th, 2005 Maputo, Mocambique
5 Growth and Convergence in WAEMU Countries By Abdoul Aziz Wane
IMF Working Paper – African Department 04-198 October 2004


7




increase production.6 For WAEMU as a whole, the adoption of lower tariffs may lead to a .23%
loss of annual GDP, based on model estimates using CET rates in 2000. This loss would require
more aid, which the authors argue should be supplied by the EU through an incentive scheme.10

CEMAC

In CEMAC, the implementation of a common trading policy began in 1994 and fully took effect
in 1999 with the elimination of UDEAC, a previous economic partnership in the region.7 The
policy included the introduction of a four rate CET (5% band for essential goods, 10% for
equipment and raw materials, 20% for intermediate goods, and 30% for consumer goods)8, the
expectation that member countries would eliminate unjustified exemptions, and the establishment
of TPG, a tax equal to 20% of the CET on imports from member countries, which would be
phased out after five years.6

Implementation of CETs has also led to significant problems. In CEMAC and WAEMU, critics
argue partial customs unions have formed because ‘there is no pooling of customs revenue,
member countries maintain customs barriers at intra-CU borders, and intra-CU trade is subject to
restrictive rules of origin.’9 These unions also face members not implementing the CET and
having domestic producers seek Rules of Origin (RoO) protection. CEMAC brought forward
problems of implementation in 2005 when the Executive Secretariat commented that excess
number of derogations taken by members could lead to a ‘breakdown.’ The Council of Minister
is hoping a 2009 goal of free movement of goods and services will reinforce the integration
process, but currently the customs union is much stronger on paper than in practice. The problems
of CEMAC continue with Cameroon because they have no incentive to cooperate with
agreements. While there is evidence the country would gain between .41 and .62% of GDP by
implementing CEMAC agreements, including the CET, research suggests they can do better with
free trade if partners fail to provide tariff free access to their markets.6

SACU

For SACU, a new agreement was signed in 2002 after years of difficult negotiations.10 Through
these negotiations, the four small countries sought to eliminate the unfair influence of South
Africa and its producers on the CET and bring awareness to their development interests. Under
the new agreement, a ‘SACU Tariff Board’ replaced the South African Board of Tariffs and
Trade, and every country now has a representative to consider changes to the CET.8 In addition,

6 Asymmetric Regionalism in Sub-Saharan Africa: Where Do We Stand?
By Olivier Cadot, Jaime de Malo, and Marcelo Olarrreaga
November 8th, 1999 ACP-EU Trade Group Pages 5,9
7 The Economic Effects of Integration in the Central African Economic and Monetary Community: Some
General Equilibrium Estimates for Cameroon
By Ferdinand Bakoup & David Tarr Volume 12 Issue 2 Pages 161-190
December 2000 African Development Review
8 Economic Partnerships Agreements, Regional Integration in Sub Saharan Africa and AGOA
By Olufemi Babarinde and Gerrit Faber
Presented at the EUSA Biannial Conference May 2007 *Draft
9 Risks and Rewards of Regional Trading Arrangements in Africa: Economic Partnership Agreements
(EPAs) Between the EU and SSA
By Lawrence Hinkle and Richard S Newfarmer
January 7, 2005 World Bank Working Paper- *Draft Only
10 The New Southern African Customs Union Agreement By Robert Kirk and Matthew Stern
Blackwell Publishing Ltd Oxford; The World Economy 28 (2), 169–190


8




CET changes must be approved by the ‘Council of Ministers,’ although the pre-existing CET
favouring South Africa was the starting tariff in the new agreement.8 The most recent CET
development comes from the EAC, which established a new Customs Protocol in January 2005.
Here, the CET has three rates applying to primary/capital goods, intermediate goods, and final
goods (0%, 10% and 25% respectively). The agreement also includes the removal of tariffs for
Tanzania and Uganda exports to Kenya, although Kenyan exports to the two countries are subject
to a reduced tariff. The tariff is supposed to give Tanzania and Uganda extra revenue as they
recover from the removal of internal tariffs and should be reduced over five years.

While CETs are crucial to the success of any customs union, there are difficulties with
implementing the tariffs and fairly compensating members. There are two important
compensation mechanisms in regional agreements: income transfers and instruments to change
patterns in resource allocation and trade.11 Compensation has been most controversial in SACU
where members agreed on a new financial revenue-sharing formula in 2002, a formula which
distributes customs revenues based on each country’s share of total intra-SACU imports.8
Further, total excise collections are distributed through a development component (starting at
15%) and a component based on each country’s share of total SACU GDP. Countries will
receive near equal shares of the development component, despite South Africa being the only net
contributor to the fund.8 The agreement should help smaller countries when external tariff
revenue declines, but it remains unclear whether or not an increase in the development component
or a more favourable CET policy are likely to occur with added layers of bureaucracy and a
reluctant South Africa.

Another important limitation on CETs and customs unions is the possibility of overlapping
membership between unions, especially between the EAC, COMESA, and SADC. All of these
groups may not be full customs unions, but there is movement towards CETs in each one. This
overlapping effect would limit the effectiveness of economic partnerships and cause trade
diversion, especially when it comes to negotiating with other regions. For example, Tanzania is
both a member of the EAC and SADC, and at used to be a member of COMESA. One study
demonstrates the problem of overlapping by comparing the possible effect of the COMESA and
SADC CET on Tanzania. The research finds the CET for either group would ‘significantly
reduce the very high levels of effective protection for regional producers.’12 The difficulties
presented on compensation and implementation of CETs have yet to appear in the EAC, even
though this customs union is structured similarly to CEMAC and WAEMU, which have
experienced significant setbacks. The issues of common external tariffs and compensation
mechanisms are not disappearing with the expansion of customs unions in Africa.






11 How can Research and Training Enhance Regional Integration in Africa? By William Lyakurwa
African Economic Research Consortium; Presented October 3rd, 2001 at a UNCTAD regional meeting in
Mauritius Pages 8-13

12 Overlapping Membership in COMESA, EAC, SACU and SADC Trade Policy Options for the Region
and for EPA Negotiations
By Jakobeit, C.; Hartzenberg, T.; Charalambides, N.
November 2005 Pages 98-113
Commissioned by Federal Ministry from Economic Cooperation and Development-Germany


9




Country experiences of implementing CETs based on WTO TPRs

Appendix E discusses issues related to the implementation of CETs in African custom unions on
the basis of WTO trade policy reviews. The following points emerge:

• The introduction of the CET in WAEMU has narrowed the dispersion of duties (Burkina


Faso) and rationalised tariff structures, and in some limit the maximum customs union
(Mali);


• The implementation of the CET has not had a major impact on the structure of trade, but it
has increased intra-WAEMU trade (Benin, Togo);


• Many countries apply rates that are lower or higher than the CET in WAEMU. Derogations
are sometimes a response to social concerns (Gabon);


• The introduction of the CET often coincides with a lower MFN rate; but this is not always the
case (EAC). In Uganda duties went up, and fiscal revenues as well;


• In SACU, countries have used special protection due to infant industry reasons: Botswana (3
times), Swaziland (from time to time) and Namibia (3 times).









10




5 Convergence and divergence in developing country
regions: summary of reviewed studies.

Appendices F and G review 15 studies related to convergence and divergence of incomes in
developing county regions. For each study the tables summarise which regions are covered,
evidence on convergence, methods used, factors affecting convergence and divergence and policy
suggestions.

The research covers a wide variety of regions: SACU, ECOWAS, COMESA, WAEMU,
CEMAC, EAC and SADC and covers convergence and divergence in GDP from 1960.

The following findings have emerged from the studies:


• Convergence in SADU over 1960-2000 (Holmes, 2005);
• No convergence in ECOWAS over 1960-2000 (Holmes, 2005);
• Convergence in ECOWAS over 1960-1990 (Jones, 2002);
• No convergence in ECOWAS over 1985-2003 (Dufrenor and Sannon, 2005);
• No convergence in COMESA over 1980-2002 (Carmignani);
• Limited convergence across WAEMU, 1990-2003 (Van de Boogaerde and Tsangarides,


2005);
• Convergence across WAEMU, 1965-2002 (Aziz Wane, 2004);
• Divergence in EAC, in the 1970s (Venables, 2003).



The methods used are either statistical (describing income levels) and more often econometric
(using standard growth models).

The following factors appear to affect convergence and divergence of incomes within regions:


• The size of the group does not matter (Holmes, 2005);
• Integration of monetary policy, harmonisation policy, different institutions and trading


rules (Carmignani);
• Labour mobility (Van de Boogaerde and Tsangarides, 2005; Konseiga, 2005);
• Reactions to shocks
• Macro economic convergence (Rossouw, 2006);
• Competitive advantage (Venables, 2003); and
• Homogeneity of the group.



These studies include policy suggestions for addressing convergence and divergence in regions:


• Groups with no convergence require additional regional development policies (Holmes,
2006);


• Design effective mechanisms for monitoring and enforcement; creation of efficient
communitarian institutions, including a regional system of central banks; and
consideration of institutional and economic factors (Carmignani);


• Greater political drive to address structural rigidities;
• Low-income countries should join north-south agreements (Venables, 2003);
• Stable governments and pro-poor policies;
• Macro economic adjustment
• Co-ordination of policies (Dufrenor and Sannon, 2005)


11






6 Further steps in the research

This research aims to examine the circumstances under which different types of regional
integration leads to convergence and growth, and how such integration could best be fostered. It
will cover all world regions, but the empirics will focus on developing country regions.

First we need a more systematic review of the issues. This review part will discuss the evidence
under which circumstances regional integration may lead to the convergence amongst its
members (distinguishing by differences in size, levels of income, type of activity, institutional
frameworks, levels of skills, types of goods and services liberalised, cross-border infrastructure
available etc). It will also examine how such integration could be fostered? Focusing on cross-
border infrastructure and finding new financial mechanisms for this is something we have already
mentioned in a regional aid for trade paper.13

We then need a more systematic formulation of hypotheses. Members of functioning regional
economic agreements do not always converge. The theory is ambiguous (it could lead to
convergence or divergence) and empirics also indicate this: Ireland and the rest of the EU
converged mainly thanks to active Irish policies, but incomes of members of the old-style EAC
diverged (Kenya vs. others). The question is not whether, but what type of co-operation matters
and under what circumstances does this lead to convergence. For instance, services, goods,
investment liberalisation, and the type of goods / services? We will review the evidence on this.

At a broad level, the hypotheses that we are seeking to test the following key hypotheses


• Regional integration leads to growth for its members
• But depending on initial economic conditions and lack of policies divergence may occur
• Appropriate policies may help to reduce diverging forces and foster converging forces.



We aim to test these hypotheses on the basis of econometric modeling.



13 Velde te, D.W. (2007), Regional Aid for Trade, ILEAP Negotiation Advisory Brief No. 12,
http://www.odi.org.uk/IEDG/Projects/Aid4trade_files/nab12_regional_aid_for_trade_jan_07%5B1%5D.pd
f


12




Appendices


13




Appendix A Intra-regional exports and imports

(Source of data in the appendix is WTO and IMF DOTS)

EAC Kenya, Tanzania, Uganda


0


5


10


15


20


25


1990 1992 1994 1996 1998 2000 2002 2004 2006


Exports


Imports


Trade




CEMAC: Cameroon, Gabon, Central African Republic, Chad, Equatorial Guinea, Congo, Rep.


0.0


0.5


1.0


1.5


2.0


2.5


3.0


3.5


4.0


4.5


5.0


1990 1992 1994 1996 1998 2000 2002 2004 2006


Imports


Trade


Exports




14




WAEMU: Benin, Burkina Faso, Cote d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal
Togo


0


2


4


6


8


10


12


14


16


1990 1992 1994 1996 1998 2000 2002 2004 2006


Exports


Trade


Imports




MERCOSUR: Brazil, Argentina, Uruguay, Paraguay


0


5


10


15


20


25


30


1990 1992 1994 1996 1998 2000 2002 2004 2006


Imports


Exports


Trade





15




CARICOM: Bahamas, Belize, Barbados, Jamaica, Guyana, Saint Vincent and the Grenadines, Saint Lucia,
Saint Kitts and Nevis, Grenada, Dominica, Trinidad and Tobago, Suriname, Haiti, Grenada, Dominica,
Montserrat.


0


2


4


6


8


10


12


14


16


18


1990 1992 1994 1996 1998 2000 2002 2004 2006


Exports


Trade


Imports


,

NAFTA: United States, Mexico, Canada


0


10


20


30


40


50


60


1990 1992 1994 1996 1998 2000 2002 2004 2006


Exports


Trade


Imports





16




COMESA: Angola, Burundi, Comoros, Congo, Dem Rep, Djibouti, Egypt, Ethiopia, Kenya, Libya,
Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Uganda, Zambia, Zimbabwe


0


1


2


3


4


5


6


1990 1992 1994 1996 1998 2000 2002 2004 2006


Exports
Trade


Imports








ANDEAN: Bolivia, Columbia, Ecuador, Peru,



0


2


4


6


8


10


12


1990 1992 1994 1996 1998 2000 2002 2004 2006


Imports
Trade


Exports







17





ASEAN: Brunei, Cambodia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam


0


5


10


15


20


25


30


1990 1992 1994 1996 1998 2000 2002 2004 2006


Exports
Trade


Imports




SAARC: Afghanistan, Bangladesh, India, Maldives, Nepal, Pakistan, Sri Lanka


0


1


2


3


4


5


6


7


1990 1992 1994 1996 1998 2000 2002 2004 2006


Exports


Trade


Imports





18




EU (15): Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,
Netherlands, Portugal, Spain, Sweden, United Kingdom


57


58


59


60


61


62


63


64


65


66


67


1990 1992 1994 1996 1998 2000 2002


Exports


Imports


Trade





SADC: Botswana, Lesotho, Namibia, South Africa, Swaziland, Angola, Malawi, Mozambique, Tanzania,
Zambia, Zimbabwe, Mauritius, Congo, Dem Rep, Madagascar, Seychelles


0


1


2


3


4


5


6


7


8


9


19
65


19
67


19
69


19
71


19
73


19
75


19
77


19
79


19
81


19
83


19
85


19
87


19
89


19
91


19
93


19
95


Imports


Trade


Exports



*Table based on averages of five year intervals (ex. 1965-69, 1970-74).


19




Appendix B FDI flows and stock as % of developing country
total, by region

Source of data in this appendix is UNCTAD

EAC


0


0.1


0.2


0.3


0.4


0.5


0.6


1980 1983 1986 1989 1992 1995 1998 2001 2004


Flows


Stock




CEMAC


-0.5


0


0.5


1


1.5


2


2.5


3


1980 1983 1986 1989 1992 1995 1998 2001 2004


Flows


Stock







20




WAEMU


0


0.1


0.2


0.3


0.4


0.5


0.6


0.7


0.8


1980 1983 1986 1989 1992 1995 1998 2001 2004


Flows


Stock





MERCOSUR


0


5


10


15


20


25


30


35


40


1980 1983 1986 1989 1992 1995 1998 2001 2004


Flows


Stock







21




CARICOM


0


0.5


1


1.5


2


2.5


1980 1983 1986 1989 1992 1995 1998 2001 2004


Stock


FDI




SACU


-4


-2


0


2


4


6


8


10


12


1980 1983 1986 1989 1992 1995 1998 2001 2004


Stock


Flows





22




SADC


0


2


4


6


8


10


12


14


1980 1983 1986 1989 1992 1995 1998 2001 2004


Stock


Flows





COMESA


0


2


4


6


8


10


12


14


1980 1983 1986 1989 1992 1995 1998 2001 2004


Flows


Stock


23




ANDEAN


0


1


2


3


4


5


6


7


8


9


1980 1983 1986 1989 1992 1995 1998 2001 2004


Flows


Stock




ASEAN


0


5


10


15


20


25


30


35


1980 1983 1986 1989 1992 1995 1998 2001 2004


Flows


Stock





24




SAARC


0


1


2


3


4


5


6


7


1980 1983 1986 1989 1992 1995 1998 2001 2004


Flows


Stock




EU (in world)


0


10


20


30


40


50


60


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002


Flows


Stocks





NAFTA(in world)


0


10


20


30


40


50


60


1980 1983 1986 1989 1992 1995 1998 2001 2004


Flows


Stock


25




Appendix C GDP Per Capita by members of a region
Source of data in this appendix is World Development Indicators
GDP in constant US$, 2000 prices; data are presented in log format

EAC


0


0.5


1


1.5


2


2.5


3


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Kenya
Tanzania


Uganda




CEMAC


0


0.5


1


1.5


2


2.5


3


3.5


4


4.5


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Gabon


Congo


Cameroon
Eq. Guinea


Central African Rep.


Chad




26





WAEMU


0


0.5


1


1.5


2


2.5


3


3.5


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Cote d'Ivoire


Senegal


Guinea-Bissau Niger


Benin


Togo-Thick Red Line
Burkina Faso- Dotted Red Line




MERCOSUR


0


0.5


1


1.5


2


2.5


3


3.5


4


4.5


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Argentina


Uruguay


Brazil
Paraguay





27





CARICOM


0


0.5


1


1.5


2


2.5


3


3.5


4


4.5


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Bahamas


Trinidad and Tobago
Antigua and Barbuda


Haiti
Guyana


Suriname


Saint Kitts


Saint Vincent


Dominica- Thick Green Line
Jamaica- Thick Orange Line
Belize- Thick Blue Line
Grenada-Thick Red Line
St. Lucia- Dotted Red Line




NAFTA


0


0.5


1


1.5


2


2.5


3


3.5


4


4.5


5


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


United States


Canada


Mexico




28




SACU


0


0.5


1


1.5


2


2.5


3


3.5


4


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Lesotho


Sw aziland


South Africa


Bostw ana


Namibia




SADC


0


0.5


1


1.5


2


2.5


3


3.5


4


4.5


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Seychelles
South Africa


Namibia


Botsw ana


Sw aziland
Angola


Congo, Dem Rep


Malaw i
Madagascar


Zimbabw e- Green Line
Mauritius- Dotted Green Line
Zambia-Think Green Line
Tanzania- Dotted Blue Line
Lesotho- Thick Blue Line


Mozambique




29




COMESA


0


0.5


1


1.5


2


2.5


3


3.5


4


4.5


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Seychelles


Libya
Sw azliand Egypt


Dijibouti


Congo, Dem RepAngola- Blue Line
Mauritius- Thick Blue Line
Zambia- Thick Green Line
Sudan- Dotted Green Line
Madagascar- Green Line
Comoros- Thick Orange Line
Uganda- Light Green Line
Burundi- Thick Light Green Line


Zimbabw e


Malaw i- Thick Brow n Line
Ethiopia-Dotted Brow n Line
Kenya- Thick Pink Line
Rw anda- Dark Grey Line
Eritrea- Grey Line




ANDEAN


2.6


2.7


2.8


2.9


3


3.1


3.2


3.3


3.4


3.5


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Peru


Columbia


Ecuador


Bolivia






30




ASEAN


0


0.5


1


1.5


2


2.5


3


3.5


4


4.5


5


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Brunei


Singapore Malaysia


Thailand
Phillippines


Indonesia


Vietnam- Thick Orange Line
Laos- Thick Blue Line
Cambodia- Dotted Blue Line




SAARC


0


0.5


1


1.5


2


2.5


3


3.5


4


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006


Maldives


Sri Lanka Pakistan


India


Bangledesh


Nepal




31




Appendix D FDI and trade as % of GDP

Chart 1- FDI Stock/GDP
Chart 2- Export/GDP (Dotted Line)
Import/GDP (Solid Line)

*All data collected from World Bank (trade and GDP) and UNCTAD (FDI only)
*Some years omitted due to lack of data (mostly 2005 and 2006)
*Some members excluded because of no data available

EAC


0


5


10


15


20


25


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006




0


5


10


15


20


25


30


35


40


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006




32




CEMAC


0


10


20


30


40


50


60


19
80


19
82


19
84


19
86


19
88


19
90


19
92


19
94


19
96


19
98


20
00


20
02


20
04


20
06




0


10


20


30


40


50


60


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006











33




WAEMU


0


2


4


6


8


10


12


14


16


18


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006




0


5


10


15


20


25


30


35


40


45


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006









34




MERCOSUR


0


5


10


15


20


25


30


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006




0


2


4


6


8


10


12


14


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006





35




CARICOM


0


10


20


30


40


50


60


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006




0


5


10


15


20


25


30


35


40


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004









36




SACU


0


5


10


15


20


25


30


35


40


45


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006




0


5


10


15


20


25


30


35


40


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006








37




SADC


0


5


10


15


20


25


30


35


40


45


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006




0


5


10


15


20


25


30


35


40


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004








38




COMESA


0


5


10


15


20


25


30


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006




0


5


10


15


20


25


30


35


40


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004






39




ANDEAN


0


5


10


15


20


25


30


35


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006




0


5


10


15


20


25


30


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006







40




ASEAN


0


10


20


30


40


50


60


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006




0


10


20


30


40


50


60


70


80


90


100


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004







41




SAARC


0


1


2


3


4


5


6


7


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006




0


5


10


15


20


25


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004







42




43


NAFTA


0


2


4


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998


6


8


10


12


14


16


18


2000 2002 2004 2006




0


2


4


6


8


10


12


14


16


18


20


1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004










Appendix E Common external tariffs in African Custom Unions, by Country, on the basis of WTO
Trade Policy Reviews 1998-2007


Customs
Union


Countries Start of CU Level of CET Implementation Issues


WAEMU Benin

TPR
June 2004


-Signed treaty
establishing the


WAEMU on 11
January 1994
-CET implemented on
31 January 2000


-Average simple tariff increased from 13.7% in 1997
(actually applied) to 14.6%


-MFN simple average is 12.1%.
-All 5,641 tariff lines are defined by the WAEMU
CET
-Does not apply the protection tax or the special
imports tax


-“An increase in the CET for agricultural products
appears possible in the context of the WAEMU’s


common agricultural policy.14” Page 34

-“According to the authorities, an analysis of the


structure of products imported since application of the
CET shows that it did not have any marked impact on
foreign trade and particularly on the breakdown of
imports. Between 1999 and 2001, however, it appears
to have fostered an increase in intra-WAEMU trade,
which achieved annual growth rates of some 23 and
21 per cent respectively.” Page 35


Burkina Faso

TPR
June 2004


-Average simple tariff has fallen dramatically since
the start of the CET from 31.1% to 12.1% MFN
-Actual applied rate is 14.6%
-Applies an additional WAEMU duty on imports from
third world countries (Statistical Fee)


-Burkina Faso applies an addition 5% TDP to
agricultural products, reducing the purchasing power


of households
-Trade is still hampered by non-tariff barriers
- “The grouping of products into four major categories


under the CET has considerably lessened the
dispersion of duties since the first review of Burkina


Faso’s trade policy in 1998.” Page 35


- “The authorities note that, as a result of the
introduction of the TPC and the CET, “Burkina is one


of the countries most vulnerable to tariff reductions
both internally and externally”.15 At the time of the


first review, the Secretariat had noted that Burkina



14 WTO (2003).
15 Service Note No. 2003 00088/MEF/SG/DGD of 29 January 2003.




Faso’s import duties were among the highest in the
WAEMU.16 According to a document provided to the


Secretariat, total losses over the period 2000-2002
were estimated to be CFAF 52 billion
(US$866.7 million). Burkina Faso has received


financial compensation from the WAEMU amounting
to CFAF 14.8 billion (US$246.7 million) for the
period 1996-2002 to offest the loss of customs
revenue as a result of the TPC.17” Page 35


Cote d’Ivoire CET not implemented since last WTO report
Mali



TPR
June 2004


-Simple average tariff has decreased to 14.6% (actual
applied)


-12.1% customs duty (MFN)
-5,492 10 digit tariff lines are applied, consisting of
WAEMU CET guidelines




-Mali still gives a significant level of protection to
agricultural products, reducing the purchasing power


of households
- “The introduction of the WAEMU’s CET has


replaced the customs duty and the fiscal import duty
with a single DD and, consequently, unified the
customs tariff. Another major change since the first
review is the decrease in the maximum rate of duty
from 35 per cent to 20 per cent (Table AIII.2), which
has noticeably narrowed the standard variation. These


changes, together with the reclassification of imports,
have greatly lowered the average tax on products
which are largely imported, particularly cereals
(70 per cent less) and sugar and confectionery (60 per
cent less). Nevertheless, the CET imposes a
maximum customs duty of 20 per cent on food
products, as was already the case under the national
tariff structure.” Page 32





16 WTO document WT/TPR/S/46, Chapter III, of 23 September 1998, page 26.
17 WAEMU Commission (2003a).


45




Niger

TPR
September 2003








Niger (cont)


-Simple customs duties at 12.1%
-14.6% simple tariff actually applied
-5,538 10 digit tariff lines have been applied, all
based on the WAEMU CET


- “Duty-free entry only applies to around one third of
the WAEMU’s intra-community trade.18” Page 30


- “The authorities have estimated that in 2000 the loss
of customs revenue due to the introduction of the full
CET and the reduction in the RS from 5 per cent to
1 per cent on 1 January 2000 amounted to
CFAF 10.8 billion. The taxable value decreased as a
result of two factors in particular: the preferences
granted to products originating in the WAEMU; and
the volume of goods admitted free of duty. The
revenue foregone as a result of various duty and tax
exemptions in 2002 has been estimated at
CFAF 14.8 billion.” Page 38


-Trade-related constraints persist and include a
compulsory statistical registration form for all imports
and exports, a national administrative values for
868 products, and an import inspection tax
- “It should also be noted that for some agricultural
products there is a wide gap between the MFN
customs duties applied and the ceiling of 200 per cent
bound in Schedule LIII annexed to the GATT 1994.
This discrepancy could lead to uncertainty and
instability in the tariff regime, although this is
lessened by the fact that Niger applies the common
trade policy of the WAEMU rather than its own tariff
policy.” Page 30




Senegal

TRP
September 2003


-Applied average tariff has dropped from more than
30% in 1994 to 14.7% in 2002


-Simple average customs duty is 12.1%
-All 5,546 10 digit tariff lines are defined by the
WAEMU CET and have been since 25 July 2002
“Prior to this, Senegal’s tariff differed from the CET
in three respects: 786 headings in Senegal’s tariff had
no counterpart in the CET; 151 headings in the CET
did not appear in Senegal’s tariff; and 146 headings
in Senegal’s tariff were not classified in accordance
with the CET.2”
Footnote Page 37

Later date unique to Senegal


-“Tariffs have been simplified and dispersion of duties
has been lessened” after implementation







46







Togo

TPR
July 2006


-The simple average applied tariff is 12.1%
-14.4% is tariff for most agricultural products
-5,643 10 digit tariff lines include provisions of the
WAEMU CET


-A Chamber of Commerce tax and certain income
taxes also apply


-Non-tariff barriers still exist, specifically with
transportation difficulties between coastal countries


(like Togo) and landlocked countries
-“The application of the preferential regime has led to
a considerable loss of revenue, estimated at CFAF
164.5 billion between 1996 and end 2005, which is
being addressed through a Community mechanism for
the compensation of shortfalls in customs receipts.”
Page 18 WAEMU wide


(WAEMU commission claims preferential regime has
increased intra-region trade)


Guinea-Bissau Signed treaty on 1
January 1997


No WTO report available





CEMAC Cameroon

TPR
October 2007


-On 5 February 1998
Heads of State
declared beginning of


CEMAC
-UDEAC CET began
in June 1993
-CET revised in 2001
to comply with the
Harmonization
System (HS)


-Imposes CET tariff ad valorem
-Average Customs Tariff is 19.1%
-Applied simple average is 20.6%
-Binds tariff at a ceiling rate of 80% for agricultural
and 50% for non-agricultural products


-Only CEMAC state to have a significant industrial
base
-Tariff implemented is called DDI and differs from the
CET on 300 tariff headings
-“Overall, the tariff structure is not such as to
encourage local processing. The heavy taxation on


inputs (in particular in non-metal mineral product
industries) increases production costs and thereby
reduces the competitiveness of the finished products.”
Page 38


Gabon

TPR
October 2007


-Simple average tariff based on the CET is 18.2%
-Tariffs bound at 15% for some non-agricultural
products and 60% for other goods (includes


agricultural products)


- “Gabon applies rates that are lower than those in the
CET to many tariff lines19, but also rates that are


higher than those for many CET lines.20 These
derogations from the CEMAC's CET are a response to
social concerns or demands by economic agents.”



19 Medicines, medical appliances and equipment; corrective spectacles; laminated products in iron or steel; minibuses.
20 Wheat flour or meslin; biscuits; various paints and varnishes.


47







Page 31


Central African
Republic

TPR
June 2007


-Simple average tariff applied is 18.2% (2006)


-Absence of a single entry point in CEMAC hurts
CAR the most because products come from Cameroon


-5,663 eight digit lines of the CET are applied (most
things covered)


Chad

TPR
January 2007





-Average tariff is 18.4%, but the actual tax levied at
the border is 21.6%
- “Chad lacks an up-to-date published version of its
tariff. Every year, the finance laws add or eliminate
relevant provisions, but these are not incorporated in
the published tariff, the latest version of which dates
from 2001.” Page 28


-The DDI is higher or lower than the CET on 23
different tariff headings


-“The range of exit duties and taxes applied by Chad
is making the country's products less competitive and


discouraging exports”
-“In general, customs procedures lack transparency,
and the transit procedures for goods bound for Chad


are lengthy and expensive, which adds to import costs
and encourages informal trade.” Page 25


Equatorial Guinea No information on the WTO Trade Reports
Congo -Simple average tariff is 18.7% (MFN)


-Applies CET for the most part, except on 37 tariff
lines that are covered as cultural items


-Also applies the GPT


-Only country to have complied by paying the internal
TPI tax


-Government points out that similar economies
(agricultural, mining) in CEMAC hamper intra-
country trade
- “The tariff is characterized by mixed escalation due
to the relatively high level of protection accorded to
unprocessed agricultural products” Page 26
- “Agricultural products account for a substantial
proportion of the expenditure of consumers, especially
those on low incomes, and their heavy taxation adds to
the cost.” Page 31



EAC Kenya



TPR
October 2006


-Treaty for current
EAC took effect 7


July 2000
-Permanent Tripartite


-Simple average applied tariff under the new CET is
12.9%, a drop of 4% in two years


-Kenya grants tariff preferences to Uganda and
Tanzania through reduced bands


-The implementation of a CET has made previous
tariff reductions redundant because of the number of


0% band products
-Because the CET is new, exceptions have been


48





Rwanda and
Burundi joined in
2007


Commission formed
on 14 March 1996


between Kenya,
Uganda, and Tanzania
-Current CET took
effect 1 January 2005


- “Tariffs are bound at a ceiling rate of 100% for all
agricultural products. For non-agricultural products,


Kenya has bound six tariff lines” MFN Tariff
Bindings Page A1-53
-Products that enter through Uganda and Tanzania to


the Kenyan border are now duty free


granted to each country, including the ability for
Kenya to impose lower import tariffs on rice from


Pakistan
-Harmonization of duty and tax exemptions have been
agreed to but have not been implemented into national


laws
-Members have been slow in reducing tariff barriers
for intra-region trade, which should be phased out by


2010
Tanzania



TPR
October 2006


-The average simple MFN tariff is 13.5% since the
CET, slightly higher than the EAC average of 12.9%


-Preference is given to Uganda and Kenya


See Kenyan explanation

-Tanzania is allowed to impose lower imports on
wheat and barley.


Uganda

TPR
October 2006


- “The move from the national tariff to the EAC
common external tariff in January 2005 resulted in an
overall increase of average duties on imports into
Uganda” Page A3-233 The tariff has gone from
9% to 12.9%.
-Grants concessions on 134 tariff lines (Lots of
manufacturing products)


-Preference is given to Uganda and Kenya


See Kenyan explanation

-The abolishment of tariffs on the movement of goods
in the EAC has especially helped Uganda because of


the large number of goods shipped through Mombasa
and the long transport time
-Fiscal revenue from imports has increased after the
CET
- There are indications that corruption, smuggling,


falsification of documents, and under-declaring of
goods and income have undermined growth in tax
revenue.21 Page A3-235


SACU Botswana








-On 1 March 1997
SACU replaced the


1910 Customs Union
-On 21 October 2002
a new treaty was
signed, changing the
SACU agreement


-CET is determined by the Tariff Board under the new
agreement of 2002 and may change (started at South


Africa level); this makes it harder for producers in
each country to seek protection
-The average simple tariff across SACU in 2002 was
11.4%


-Goods imported to the SACU area may be subject to
four types of charges: ordinary customs duties, excise


-In practice, applied customs tariffs, excise duties,
valuation methods, origin rules, and contingency trade


remedies are, so far, the only trade policy measures
harmonized throughout SACU
-Botswana has used special protections on three


occasions to protect infant industries



21 Ayoki et al (2005).


49


















Bostwana/SACU
(cont)


duties, levies, and VAT or sales tax
- Ad valorem, specific, mixed, compound, and


formula duties are all part of the complicated tariff
structure


-7,090 tariff lines exist, 5,933 of which are ad
valorem
-Specific duties apply to agricultural products
-South Africa represented the Union to the WTO on
tariff rates, but countries have varied their bound rates


Lesotho See Botswana explanation -Tariff evasion has been an increasing problem
through the misrepresentation of goods or


undervaluation
-The bureaucracy required for goods to enter Lesotho
from South Africa is burdensome. Import permits are


required for goods originating in non-SACU countries
-Many of Lesotho’s trade provisions are similar to
South Africa, including anti-dumping measures


Swaziland See Botswana explanation -Anti-dumping and countervailing duties applied for
imports going through South Africa hurt the economy;
trade success largely depends on South African policy.


-Access to sugar greatly affects trading with external
partners such as the EU
-“From time to time” Swaziland has used SACU
protections to help infant industries


South Africa See Botswana explanation -South Africa also offers reduced tariffs to the EU,
Zimbabwe, Milawi, and Mozambique
-Various tariff refunds are available if companies can
prove they have greatly increased production costs


50




-The focus in the customs area has been on export
promotion


Namibia -On 10 July 1990
Nambia became a


member after being a
de facto member
previously


See Botswana explanation -Streamlined custom procedures have made the
process easier; just one document is required in most


cases
-Nambia has protected infant industries on three
occasions.
-Certain Nambian agricultural imports below an
annual quota are duty free




51




Appendix F Summary of Convergence/Divergence Research


Study Regions
covered, time
period


Evidence on
convergence or
divergence in regions


Method used to establish
this


Factors affecting
convergence and
divergence in
regions


Policy options / suggestions


Winners and Losers from
Regional Integration
Agreements


Anthony J. Venables
Pages 747-761
The Economic Journal
Volume 113 October 2003


East African
Common Market


Collapse in 1977;
Econ Community
of West Africa
1972-1997;
Generally includes
all low income
countries.


Divergence in customs
unions with low income


countries. An example is
given between Kenya and
Uganda where one country
will gain more than the other.
Cote d’Ivoire and Senegal
saw a huge increase in
manufacturing value added
in their agreement over other
nations.


Three models with two small
countries and the rest of the


world are used.
1) Diagrammatic analysis
including competitive
advantage and trade
creation/diversion
2) Multi-good Ricardian trade
model
3) Heckscher-Ohlin structure
with production
differentiation.


-The level of
competitive advantage


between member
countries; a few nations
will have an extreme
competitive advantage
while others will have
an intermediate
advantage.
-Skilled vs. Unskilled
labour (ratios)


Low per capita income countries
should join customs unions/agreements


with more development countries that
possess a highly skilled workforce
(‘North-South’ Agreements).


Global Trade Integration and
Economic Convergence of
Developing Countries
William Amponsah, Dale
Colyer, and Curtis Holly


P 1142-48, Vol. 81, No 5
1999


American Journal of
Agricultural Economics


Botswana, Kenya,
and Ghana


mentioned; main
focus between
developing
countries and
developed
countries since the
1960’s.


Convergence may be
occurring between high


income/low income nations
if the low income nations
have a faster growth rate
(rather than a higher real
GDP/income level). African
nations are the exception
because there has been little
sustainable growth.


-Growth rates, Income levels,
and Governing Structures
among various regions are
referenced.
-Limited econometric data is
used; paper is a survey of


previous literature and is more
background information.


-Governance: Stability
and transparency are
needed for growth and
thus convergence with
more developed
countries
-Investment in human
capital and a skilled
labour force
-Financial Market
stability- ease of


investment
-Agriculture a deterrent
because of volatile
commodity prices


-Developing countries have to establish
stable governments and pro-growth


policies (open economies)
-Integration into the high skill global


economy vital


52




Study Regions
covered, time
period


Evidence on
convergence or
divergence in regions


Method used to establish
this


Factors affecting
convergence and
divergence in
regions


Policy options / suggestions


Regional Integration
Agreements: A force for
convergence or divergence?


AJ Venables
World Bank and LSE
Prepared for the Annual
Bank conference on


Development Economics in
Paris, June 1999


In general focuses
on FTA’s


involving different
income levels.


Divergence is re-emphasized
for FTA’s involving low


income nations because of
competitive advantage and
also agglomeration of
economic activity. Graphical
evidence is provided to show
the benefit of a ‘North-south’
agreement.


-Convergence/divergence is
demonstrated through


differences in skilled labour
and in national income
-Agglomeration is based on
centripetal and centrifugal
forces in industrial
economics, and what FTA’s
do to the existing model.


See previous sections. Emphasis on FTA’s between rich and
poor countries instead of partnerships


within poor countries.



*Economic Integration and
Convergence of Per Capita
Income in West Africa


Basil Jones
Pages 18-47
Volume 14 Issue 1 June
2002


African Development
Review




Convergence is
tested in ECOWAS


countries between
1960 and 1990,
although
comparisons to
other regions are
made.


Convergence is occurring
within ECOWAS both in


terms of a comparison to rich
nations and a look at income
equality between the
members. However, the speed
at which poor countries are
catching up to rich countries is
slow. A convergence club is
forming which ECOWAS
represents, but it’s at the lower
end of the convergence
spectrum.


Two types of convergence
are tested based on previous


empirical research. β
convergence is tested for to
determine whether or not
poor countries are growing
faster than rich countries (a
negative correlation
between initial per capita
income and growth in per
capita income). σ
convergence tests whether
or not the dispersion
between per capita income
levels declines over time.


The homogenous nature
of the countries can


affect whether or not
convergence occurs.
The author explains the
population of the
country, its economies’
relative size, its natural
resources, and its
returns on capital all
affect the speed of
integration. An
overview is given of
different convergence
theories, including the
Solow Model and the
convergence
hypothesis.


Policy makers should look at whether
or not real economic convergence is


occurring. While the nominal
convergence indicators can be justified,
it is more difficult to rationalize them
on an empirical basis.


53




*Regionalism in West Africa:
Do Polar Countries Reap the
Benefits? A Role for
Migration



Adama Konseiga
Center for Development
Research and IZA Bonn


* Growth and Convergence
in WAEMU Countries



Abdoul Aziz Wane
IMF Working Paper *Views
not representing IMF



October 2004


Convergence and
growth is measured


in WAEMU
countries between
1965 and 2002.


This study finds convergence
occurring across the WAMEU


both absolutely and
conditionally. When country-
specific variables are omitted,
the economies tend to
converge at 6 percent a year.
The growth is even faster
when countries have similar
investment ratios. The
difference between factor
accumulation and TFP growth
is also explored.


Panel data models are used
in this empirical testing


because of its advantages
over pure cross sections or
time-series data. The author
explains how estimates are
more difficult to establish
with panel data, and uses
mean group and pooled
mean group estimates. The
Solow model is also
examined and the
convergence in the
WAEMU does not fit the
traditional ‘catch-up’
prediction.


Different convergence
groups are explained,


including the idea of
‘club convergence’
where the initial
conditions of countries
are the same. The
paper found that
investment in human
capital is an important
determinant of per
capita output growth


For countries like Cote d’Ivoire and
Senegal, there should be less emphasis


on macroeconomic adjustment, and
other countries should focus on
political stability and sound
government spending.




Discussion Paper No. 1516
March 2005


Countries in
West Africa
are mentioned,
specifically
Cote D’Ivoire
and Burkina
Faso. All of
the literature
cited is recent,
and the data
covers
different parts
of the last 30
years.


Convergence is found within the
Union and the convergence path


benefits more than the polar
counties. This paper also focuses
on the migration of skilled labour
both in and out of the Union and
finds that migration out of the
Union to France and other
developed countries leads to a
‘brain gain,’ while internal
migration to Cote d’Ivoire is not as
beneficial (‘brain drain’).


A modified version of the Solow
growth model is used along with


panel data and educational
information from each of the
member countries. The model is
used with and without migration
data to see its affect on
convergence. The author has
taken great care to remove bias
through the use of first
differences, etc.


Convergence and economic
growth are affected by migration


of the workforce, and a good
background on migration theory
is presented. In this background
literature it is found that human
mobility unambiguously speeds
up convergence of product
levels. A lot depends on which
countries have the educated
work force and where it migrates
too, as the location greatly
affects the benefits.


Poor countries losing
parts of their


workforce should
develop irrigation and
agricultural
investments that will
optimize their rural
labour force. Of
course, education is
important for these
countries because most
of the brain drain is
occurring at the
secondary schooling
level.





54




African Convergence Clubs:
The Effects of Colonialism
and Trade

Dan Ben-David and Michael
W Brandl

University of Texas
Graduate School for


Business
July 1996


Africa countries
are analyzed in
terms of
regional blocks,
colonial ties,
and trading
partnerships.
Most of the
research on
convergence is
between 1960
and 1988.


There is evidence of convergence
among states on some levels. When


looking at regions, the authors
found statistically significant
convergence in pooled results in
West Africa and East/Central
Africa. There was no significant
convergence between countries who
shared the same colonial dictator,
but countries that open up their
trading to multiple partners see
more convergence than countries
who stick to past colonial powers.


The paper tests convergence
using the traditional neoclassical


model and time series data. A lot
of the regression results do not
appear to be statistically
significant, although there are
enough results to reach general
conclusions. All of the
hypothesis testing is found in the
back tables.


The focus of this paper is the
effects of trade on convergence.


The author argues there are
‘convergence clubs’ on different
levels across Africa. Much
emphasis is placed on the history
of each region and how that has
developed into these
convergence clubs of today.


The authors argue that
former colonial rulers


need to loosen their
ties to former states
because trading
exclusively with these
countries makes them
too dependent and
does not allow for
convergence.


Testing Real Convergence
in the ECOWAS countries
in Presence of
Heterogeneous Long-Run
Growths: A Panel Data
Study



Gilles Dufrénot and Gilles
Sanon


Centre for Research in
Economic Development and


International Trade,
University of Nottingham
October 2005


ECOWAS
countries are


analyzed from
1985-2003 for
convergence
emphasizing
differences
between
countries.


No real convergence is found
among the members, and there is


even divergence. The model shows
that countries have both short and
long term structural heterogeneity,
and thus follow their long-run
growth paths. This is different from
previous studies that assume a
homogenous long-run growth path.


Panel data techniques are used in
an error correction model that


takes into account the latent
heterogeneities across countries.
Results are compared using the
mean group estimator and results
obtained with slope heterogeneity
only in the long-run.


Niger, Nigeria, and Togo are
said to lag behind because of the


‘poverty trap’ issue. Everything
from membership in an
economic and monetary union to
peer pressure and regional
surveillance can make countries
more homogenous in the short-
term, but they are one different
growth paths because of
different economic structures,
aid spending, etc.


The author says the
only way to eliminate


structural
heterogeneity is
through a coordination
of policies, which is
already on the agenda
for WAEMU and
ECOWAS countries
and their conditions
for nominal
convergence.




55




Appendix G Summary of Africa Specific Research- Convergence/Divergence Continued


Study Regions covered,
time period


Evidence on convergence or
divergence in regions


Method used to establish
this


Factors affecting
convergence and
divergence in regions


Policy options /
suggestions


Is Long-Run Output
Convergence
Associated with
International
Cooperation? Some
new evidence for
selected African
countries


Mark J. Holmes
Waikato University
Journal of
Economic


Development
Volume 30, Pg. 67-
86, Number 2,


December 2005


CFA, SACU, and
ECOWAS countries are
tested for long run per
capita income
convergence between
1960 and 2000.


There is strong long-run
convergence in both CFA and


SACU, with the latter having most
convergence. However, there was
no evidence of long-run
convergence in ECOWAS. It
appears that monetary unions did
better than trade agreements in
convergence. There are also
different levels of convergence
within the groupings; for example,
countries that were originally
stationary in the CFA did not
experience strong convergence.


This test is based on whether the
first largest principal component,


based on benchmark deviations
from base country output, is
stationary or not. The author
claims that unit root testing of the
first LPC based on income
differentials offers a number of
advantages over existing tests of
convergence because the choice
of base country is not as
important (where it is using panel
data).


The size of the group does not
appear to greatly affect


convergence; larger groups did
just as well as smaller groups. It
is important to know whether or
not a country was initially
stationary, as this affects how
great the convergence is. The
paper focuses more on the model
than on factors surrounding his
results.


The groupings that
exhibited little or no


evidence of
convergence may
require additional
regional development
policies aimed at
facilitating closer
integration among
member states.
Researchers should
also reflect on why
some regional
agreements are better
at producing
convergence than
others.


The Road to
Regional
Integration in
Africa:
Macroeconomic
Convergence and
Performance in
COMESA


Fabrizio
Carmignani


United Nations
Economic


Commission for
Europe
Volume 15,


Covers more than a
dozen countries that fall


within COMESA, an
economic agreement
attempting a common
currency by 2025. Data
is from the last 10-20
years (1980-2002).


Generally speaking, there is no
evidence of significant convergence


in the COMESA countries. In fact,
substantial divergence and
heterogeneity still exist. There
appears to be a group of countries
converging near the bottom of the
income measurement, making the
overall disparity larger. Despite
this, there is evidence that business
cycles are synchronizing in some
member states.


Testing models are based on past
literature and include both time-


series and panel data. The
income convergence is tested to
determine the existence of a σ
convergence.


There are indications that
monetary policy stances are


integrating, which should make
convergence more likely in the
future. The author states that
harmonization policy, different
institutions, and trading rules all
affect convergence among the
countries. There is a need to
‘break up’ countries at the
bottom of the spectrum.


The author lists four
major policy


suggestions based on
the research.
1) Design effective
mechanisms for
monitoring and
enforcement.
2) Realize a preferred
trading area with the
elimination of certain
barriers.
3) Creation of efficient
communitarian
institutions, including


56




Number 2, Pages
212-250
Journal of African
Economies





a regional system of
central banks.
4) Full considering of
institutional and


economic factors.


Ten Years After the
CFA Franc
Devaluation:
Progress Toward
Integration in the
WAEMU


Pierre van den
Boogaerde and


Charalambos
Tsangarides
African
Department- IMF


Working Paper
July 2005


WAEMU countries are
investigated in three


different sub-periods
after the devaluation of
the CFA franc to test for
convergence and
integration. The first
period is from 1990 to
1993, the second from
94-98, and the third is
from 99-03.


Convergence tests for a number of
different indicators show limited


convergence across WAEMU
countries. Neither the sources of
GDP growth nor the uses indicate
progress toward convergence. The
‘gravitational pull’ from WAEMU
to poorer countries was absent
during the periods. In addition,
fiscal convergence is also limited,
even though the homogeneity of
countries’ tax revenues and
expenditures have improved.


A wide variety of testing methods
are used here, testing for σ


convergence, β convergence, and
some measure of rank
concordance (y convergence).
Other ‘co integrating
relationships’ among variables
are also analyzed.


For the financial variables, a
highly divergent evolution in the


level of investment outlays and
in debt service costs has
explained the lack of
convergence. The difference
between country-specific and
regional policies also affects
who sees the benefits from the
agreements. The decrease in
labour mobility has also
hindered economic growth and
convergence.


The author states that
reversing the lack of


convergence will be
difficult, and the
nations in the union
will need a
significantly stronger
political drive to
overcome the
narrowness of their
economies and lessen
structural rigidities.


The Economic
Effects of
Integration in the
Central African
Economic and
Monetary
Community: Some
General
Equilibrium
Estimates for
Cameroon


Ferdinand Bakoup


An analysis of
Cameroon before and


after the formation of
CEMAC, and whether or
not they benefit from the
partnership/other
countries benefit.


Convergence is not specifically
tested, but there is evidence that


Cameroon has regional market
power within the economic group.
Because of CEMAC, the author
estimates that Cameroon will gain
between .41 and .62% of GDP.
Improved Access to partner markets
and a reduction of the external tariff
account for most of the gain.


Three aspects of CEMAC
agreements are analyzed,


including improved access to
CEMAC markets, preferential
tariff reduction and reduction of
external tariffs through
implementation of the common
external tariff of CEMAC.
Estimates are done with a
comparative statistics model,
although estimated gains from
free trade will be larger in a


Further preferential tariff
reduction by Cameroon will


have a negligible quantitative
impact. The author also finds
that Cameroon would gain even
more from free trade if it
implemented a unilateral trade
agreement instead of CEMAC
because of regional market
power.


The policy
implications are not


described, but it
appears the importance
of Cameroon to the
CEMAC must be
taken into account
when deciding on
further agreements;
otherwise, they may
decide to go it alone.


57




and David Tarr
Volume 12 Issue 2
Pages 161-290
December 2000
African
Development
Group


dynamic model with endogenous
growth. The quantitative analysis


incorporates the welfare changes
of all goods.


Banking Sector
Integration and
Competition in
CEMAC



Samar Saab and
Jerome Vacher


IMF Working Paper
January 1st 2007


Retail banking
integration in the


CEMAC is considered in
this paper and whether or
not convergence is
occurring there. Data
are from 2000 to 2004/5.


There is some evidence of price
convergence in average interest rate


spreads. However, the empirical
evidence is not supposed by an
increase of cross-border flows in
retails loans and deposits. Price
convergence may merely reflect
excess liquidity in the region. Bank
competition in CEMAC is limited,
which limits further integration.


Various methods allow a
quantitative assessment of the


degree of financial integration
and are based on interest rate
data, bank structure data, mergers
and acquisitions data, and bank
concentration data. σ
convergence is tested for in the
interest rate spreads.


A number of factors could affect
convergence in the financial


markets.
1) Increase in bank deposits
because of settlement of
government arrears.
2) A scarcity of investment
opportunities has lead to high
liquidity.
3) Limited lending opportunities
exist.


Price convergence
implies that price


differentials for the
same financial service
should be reduced,
down to a level
explained mostly by
the existence of
arbitrage or
transportation costs.


Is the Proposed East
African Monetary
Union an Optimal
Currency Area? A
Structural Vector
Auto regression
Analysis


Steven Buigut and
Neven Valev


Andrew Young
School of Policy
Studies- Working
Paper 04-07
September 2004


Factors to measure
economic integration are


analyzed for countries in
the EAC from 1970 to
2001. Countries are
specifically mentioned
when it comes to
discussing economic
shocks and whether they
are uniform between
countries.


Convergence is not directly
measured, but factors leading to


convergence are analyzed. The
paper concludes that forming a
currency union would be the wrong
decision right now, although
increased integration is a positive
step in the process. While the
variability of real output after
supply shocks is low among
countries, there is high variation
when there is a demand shock. In
general, shocks are mostly
asymmetric.


The paper uses a two variable
VAR model to identify supply


and demand shocks for East
African countries.


Here, the main factor to explain
convergence is the countries’


reaction to different shocks on
the market. Only the
contemporaneous supply shocks
for Kenya and Burundi are
positively and significantly
correlated. The author does
mention that symmetry of
shocks though important is only
one aspect forming a monetary
union.


Further integration is
suggested in order to


reach a monetary
union. More research
must be conducted to
estimate the welfare
effects of a union that
includes a multi-
country theoretical
framework with some
of the region’s key
economic and political
features.


58







An Analysis of
Macro-Economic
Convergence in
SADC


Jannie Rossouw
University of
Pretoria/ SA
Reserve Bank


September 2006


Countries in SADC are
analyzed to determine


whether or not a
monetary union can exist
if all of the macro-
convergence criteria are
not met. The author
compares the current
situation to that of the
EU.


It appears that SADC countries have
mixed results in meeting their goals


for a monetary union, which must
be met by 2008. Some countries
achieved their goals in 2004 and
have maintained this progress, while
others have not been as successful.
The author argues that meeting
these criteria are not vital to
establishing the union, and cites the
EU as an example.


Simple data on inflation rates and
GDP are presented and compared


to the required benchmarks.


The author argues that macro-
economic convergence goals


have to be viewed properly in
order for true convergence to
occur. Instead of thinking of
them as a condition to enter an
agreement, they should be
viewed as a constant goal, even
in the EU.


A monetary union is
still possible in SADC


even if all the
countries do not need
their goals.


59




Login