Trade BlocsAfrican Experience

Jan Willem GunningVrije Universiteit Amsterdam

ERF, Amman, Jordan, March 19, 2017

The African experience

• regionalism adopted in 1958: continent of small economies, many landlocked • enshrined in OAU charter 1963• rationale in the 1960s and 1970s: industrialization requires integration• Abuja 1991: Pan-African Economic Community by 2025• numerous initiatives, often partly implemented, with overlapping membership• intra-bloc trade remained very low

poor implementationvery high transport cost low trade potential: similar comparative advantage

Oyejide, Elbadawi and Collier (eds.) AERC study (1997) Lyakurwa et al. (1997), Jebuni (1997), Hartzenberg (2011)Collier and Gunning (1995)

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Economic Partnership Agreements (EPAs): linking regional blocs with the EU

• original idea: using EU as external agency of restraint for reforming governments

• controversy: little additional access to EU market, EU wanted access to African markets (but allowed long adjustment periods)

• slow process: stepping stone with Ghana signed a few months ago

Collier and Gunning (1995)

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Beware: trade blocs may reduce your welfare

• traditional economic welfare analysis (constant marginal cost, Viner): bloc

may cause a welfare loss (trade diversion)• with increasing marginal cost within the bloc that becomes certain • East African Community (EAC): Tanzania imports from both Kenya (IMC)

and rest of the world (CMC, marginal supplier)loss in Tanzania: lower tariff revenue, consumer surplus unchanged gain in Kenya: higher producer surplusaggregate loss for the bloc.

Panagariya (2000) Gunning (2002)

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Fiscal and distributional problems• loss of tariff revenue • unequal division of the spoils: perceived or real• collapse of the EAC in 1977

Kenya seen as gaining disproportionately • with increasing marginal cost (2 bloc members, A and B):

productions costs high in A, intermediate in B, low in ROW if A (welfare loss) poorer the bloc creates divergence if A richer the bloc creates convergence

Panagariya (2000)

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Divergence in a trade bloc

• South-South bloc: costs fall and incomes rise from A to B to ROW (more capital intensive); bloc benefits B (richer bloc member) at the expense of A; divergence

• North-North bloc: costs fall and incomes rise from ROW to A to B (bloc members have high capital intensity relative to ROW); bloc benefits A (poorer bloc member) at the expense of B; convergence

• trade diversion caused by regional bloc benefits the member most like the ROW in terms of income (capital intensity): the poorest member in a North-North bloc, the richest member in a South-South bloc

• hence convergence in the EU (Ireland benefits), but divergence in the EAC (Kenya benefits)

World Bank (2000)

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Commitment and restraint

• divergence (real or perceived) undermines political commitment• EPAs (EU-Africa blocs) have this problem• regional bloc fails as agency of restraint (lock-in device) if loss of

membership not an effective deterrent (Brexit?)

Fine and Yeo (1997)

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Scale effects and product differentiation

• in Krugman’s (Dixit-Stiglitz) model smaller country produces fewer goods in autarky

• with trade no firm needs to close (“2 + 2 = 4”) and the smaller country gains most: Benin gains more from trading with Nigeria than vice versa

Krugman (1980) African Development Bank (2000)

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Conclusion

• Regional blocs require strong commitment EU: preventing war

• blocs require strong states: fiscal and distributional effect

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