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Apr 20, 2012

SA backs ‘developmental integration’, but still keen on African gateway role

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One of the few novel themes explored in the latest version of South Africa’s Industrial Policy Action Plan (Ipap) is the concept of ‘developmental integration’ – an emerging idea that seeks to align South Africa’s industrial policy aspirations with the even more challenging goal of regional integration.

The notion is premised on an analysis showing that trade barriers are not the main impediment to raising Africa’s intraregional trade levels, which remain almost trivial when compared with goods and services flows in other territories.

Instead, the main constraints relate to the absence, or inadequacy, of the physical infrastructure linkages required to facilitate trade flows, as well as the continent’s under- developed production structures, which decreases the opportunity for trade in complementary value-added products.

In fact, World Bank research shows that, while 85% of intra-Southern African Development Community (intra-SADC) and intra-Common Market for Eastern and Southern Africa (intra-Comesa) trade is free of duty, nontariff barriers affect at least one-fifth, or $3-billion, of recorded regional trade.

Africa, therefore, lags the rest of the world in intraregional trade flows, which make up only between 10% and 12% of all trade. By contrast, intraregional trade accounts for more than half of total trade in Europe, about 40% in North America and 30% in Asia.

This reality represents a particular problem for South Africa as the newest member of the ‘Bric grouping’, embracing the fast-growing emerging economies of Brazil, Russia, India and China. With a population of around 50-million and a gross domestic product (GDP) that is about one-quarter of India and Russia’s, one-fifth of Brazil’s and just one-eighteenth of China’s, South Africa’s inclusion in the bloc, now known as Brics, rests largely on its ability to represent the economic potential of Africa as a whole.

The trade figures reinforce this, with Standard Bank research showing that, between 2001 and 2011, Bric–Africa trade surged from $20-billion to more than $250- billion, buoyed materially by China–African trade of over $160-billion.

In contrast, the Word Bank reports that, while the SADC’s exports to the world as a proportion of regional GDP increased from 20% to over 30% during the last decade, the share of exports within the region has grown slowly and accounts for only 3% of regional GDP.

Behaving as a Continent
South African policymakers are, thus, acutely aware that regional integration offers the only real justification for the country’s inclusion in the group. For that reason, they are often quick to point to the work they are doing to facilitate the proposed trilateral free trade area, or T-FTA, involving the SADC, Comesa and the East African Community, or EAC.

Should it be concluded (a preliminary date of 2013 has been set for its launch), the T-FTA would span from Cape to Cairo, include 27 countries and their 533-million citizens, and have a combined GDP of $833-billion, or a GDP per capita of $1 500. That equates to 58% of Africa’s GDP and 57% of the continent’s population.

As South Africa’s Trade and Industry Minister, Dr Rob Davies, has acknowledged, the ‘grand FTA’ could mean that Africa begins to “crack the numbers” when com-pared with the other Brics members.

Goldman Sachs Asset Management chairperson Jim O’Neill, who invented the term ‘Bric’ more than ten years ago, agrees that it is difficult to justify the inclusion of the $400-million-GDP South Africa into the club of prestigious emerging-market majors.

But he wrote recently that South Africa could “justify its position as a representative for Africa”, as the continent has the combined number of people and GDP size to be regarded as a “true Bric”.

“The combined GDP of the 11 most-popu- lated African nations is similar to that of either India or Russia and has the potential to be as large as Brazil’s by 2050, something as large as $10-trillion, between six and ten times bigger than today. Now that South Africa is present in the Brics group, I think it is incumbent on the country to be at the forefront of trying to help Africa, at least economically, to pursue goals of behaving as a continent,” O’Neill wrote in the Sunday Times in early April.

The longer-term outlook reinforces Africa’s Brics inclusion further, with Standard Bank African political economy unit senior analyst Simon Freemantle having identified five key trends that could improve the continent’s “allure” over the medium term. These include a population expansion to two-billion by 2050, rising and rapid urbanisation, the adoption and absorption of new technologies, the continued unlocking of abundant mineral and agricultural resources and the deepening of the continent’s financial sector.

Unconventional Integration
Still, there is a growing awareness that the conventional regional integration model, driven by tariff liberalisation and the gradual freeing up of the movement of factors of production, is unlikely to prove successful in Africa.

Davies explains why: “We often sit down in august bodies and discuss the institutional arrangements [needed to stimulate regional integration], without understanding the conceptual basis underlying those kinds of programmes – particularly given that the model is typically that of European integration. In Europe, there were countries with high levels of complementarity and there was already a degree of specialisation around value-added products. In Africa, we don’t have that in place. We have a situation where all of us are exporting primary products outside our [continent] and importing value-added products from outside our [continent].”

South Africa is a slight exception, owing to the fact that the country sells value- added products across the continent. “Already, trade with the rest of the African continent has a disproportionate impact on local manufacturing. Local manufacturing exports to the continent are a significant part of our total trade with the continent.”

But intraregional trade is not based on complementarities, whereby one country typically exports what another country, in the same region, imports. In addition, the barriers are rarely primarily related to tariffs, but rather to the absence of joining infrastructure and the fact that many exported products compete with, rather than complement, each other.

“We have the infrastructure that takes products from the mine to the coast,” Davies explains, noting that South Africa’s only trade link to the fast-growing Angolan economy, for example, is through the con-gested Luanda port.

The Ipap document, therefore, begins to explore what is needed to facilitate development integration by dealing with the “real barriers to us trading among ourselves”.

Not One-Way Traffic
But the document also asserts that South Africa cannot simply expect to increase its value-added exports to the continent without also supporting industrial development in the rest of Africa.

“We will not be able to simply promote South African value-added products without engaging in a process of industrialisation in the rest of the continent,” Davies explains, adding that the term ‘development integration’ has started to emerge in all the regional groupings, of which South Africa is part.

The paradigm involves backing trade- related decisions with firm infrastructure development programmes, as well as cooperation around industrial policy.

The Council of African Ministers of Industry has reportedly already agreed that the initial work be focused on the beneficiation of mineral products ahead of export, the promotion of agroprocessing industries and the development of the African pharma- ceuticals industry.

Moreover, the latest Ipap document, cover- ing the period from 2012 to 2015, identifies a number of areas of cooperation, including industrial financing; standards, quality assurance, metrology and accreditation; cross-border infrastructure projects; and the development of skills needed for industrialis- ation.

The document states that the Industrial Development Corporation and the Development Bank of Southern Africa will be encouraged to play an expanded regional role and that South Africa will also work with African banks to secure “funding lines” for the productive sectors, such as manu- facturing, agroprocessing and minerals beneficiation. South Africa also plans to work with its Brics partners to liberate financing for industrialisation and infrastructure initiatives.

One of the high-profile infrastructure initiatives identified in the latest Ipap is scoping the road and rail links associated with the so-called North–South corridor, which could connect Durban to the Democratic Republic of Congo.

“We will be taking a number of these proposals to the discussions that will be taking place in the various regional structures,” Davies says.

Infrastructure in Focus
The focus on infrastructure is likely to receive broad-based support, but implementation will probably continue to prove challenging, as witnessed recently by the inability of the region to make solid progress on the Grand Inga hydropower project, which has been effectively sent back to the drawing board.

However, there is also no doubting the importance of these programmes – a point emphasised by Deloitte Touche Tohmatsu global manufacturing industry group leader Tim Hanley. He says foreign investor interest in Africa is rising, but infrastructure deficits remain a “significant impediment” to foreign direct investment in manufacturing.

“The ability to move product within countries and around the continent in a cost- effective way is critical. But, as of today, it is seen as a pretty significant impediment to making an investment decision,” Hanley tells Engineering News. The divergence of government policy across the 54 countries of Africa and the prevailing skills backlogs are two other impediments to an acceleration of manu- facturing investment.

However, there are also strong underlying positive drivers, such as Africa’s growing and youthful population, its strong urbanisation trends and a rising middle class. “These positive drivers are the main reason why we believe manufacturing has a good future,” Hanley says. Besides possible resources- linked value-added activities, Deloitte Touche Tohmatsu expects that sectors such as chemicals, agroprocessing, packaging and automotives could be early beneficiaries of Africa’s more-entrenched growth profile.

Likewise, Frost & Sullivan director of operations for Africa Hendrik Malan argues that the paradigm is shifting from questions about whether to invest in Africa to having to manage the risk of not being invested in Africa. But the much-vaunted African renaissance remains nascent and investors are still confronted with serious obstacles, from corruption and conflict through to infrastructural deficits and low levels of intraregional trade.

Complementary or Competitive
How do these complementary industrial development proposals gel with South Africa’s stated aspiration of being a so-called ‘gateway’ to the continent, which implies a more competitive relationship?

Davies responds by saying South Africa does not aim to be “gatekeeper” and has never proposed that investors deal with the rest of the continent through South Africa.

However, South Africa remains keen on being a gateway to the region and the continent. “If companies see that there is benefit from working in partnership with South Africa, because South Africa has experience with the rest of the continent, or South African companies know how to work in other African countries, or they require the financial services platforms we offer, and so on, well, that’s another story.”

He says that, despite reports to the contrary, there has been no decline in the number of companies considering establishing regional headquarters in South Africa, nor in the number of firms hoping to work in partnership with South African companies to become active on the African continent.

“If people want to do that, well, we are very open to that game. Realising, of course, that there are also many other potential gateways into the African continent, which are being taken up by outside parties. But an increasing number, actually, are interested in the possibilities of working with us, as South Africa,” Davies concludes.

No doubt, South Africa will also need to tread carefully in its chosen role as African proxy within the Brics, especially given the disquiet that is sometimes expressed, often privately, about the colonial-like behaviour of the country, and some of its companies, in the rest of Africa.

As with the country’s desire to balance its gateway aspirations with greater infrastructure and industrial cooperation, this is likely to prove a tall order.

Edited by: Martin Zhuwakinyu
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