Integrated markets require integrated policies… and strong institutions

An article published on Modern Diplomacy analyses the conditions and the pathway for Africa to enter into a virtuous circle of economic development. According to the US economist and bestselling author Jeffrey Sachs, Africa could replicate the success of China by adopting similar strategies, specifically by integrating its markets and engaging more actively in global economic diplomacy. What does this mean?

According to the Cambridge Dictionary, market Integration is a situation in which separate markets for the same product become one single market. This happens for instance when tariffs that are applied on the transferal of a product from a market to another are removed. In the African context, the term refers to the degree to which the internal markets of the different African States or regions (e.g., Free Trade Areas or Customs Unions in the continent) are combined with each other so to operate as a single big market, where goods and services can be freely traded without any restrictions, both of tariff and non-tariff nature. This is basically the underlying logic of the African Continental Free Trade Area (AfCFTA) project.

However, while China is a unitary State, Africa is made up of 54 nations with huge disparities in levels of economic, social and political development. Such fragmentation poses a problem for the integration of African markets. According to Sachs, this integration can be achieved by implementing the right policies and with a strong level of commitment by African States. Basically, his idea is that Africa needs to unify under a common economic and political framework by developing common and integrated policies in all those areas that are key for the development of an integrated market. Among these, he mentions transport, energy, and trade. Indeed, only the development of such common policies will enable the continent to function as a cohesive entity and will allow it to expand its internal market and enhance its diplomatic influence globally.

But there is still a missing factor in this equation. Africa also needs centralized institutions to oversee these integrated policies, they cannot be administered at a decentralized level by virtue of decision-making schemes exclusively driven by African States.

The interdependence between market integration and institutions is not new. Keller and Shiue, based on the analysis of some successful examples in history, showed that most of market integration experiments were a consequence of institutional changes previously introduced, noting in “Market Integration as a Mechanism of Growth” that in most cases it is an institutional change to drive market integration, and not the contrary, as it is happening in Africa, where African governments created a continental Free Trade Agreement that presents more the characteristics of a Common Market (because of complementary policies in the area of free circulation of persons, investments and services), without first creating a structure capable to administer these policies at supranational level. In this regard, a question that African leaders should pose to themselves is if it was a good idea to move from the AfCFTA as the starting point for integrating African markets, or rather, they should have first aimed at reinforcing supranational continental institutions by transferring them more extensive decision-making powers in trade-related matters. Nobody can deny that despite the decades-old experiments of economic integration conducted at sub-regional level in all parts of Africa, national States still today play a dominant role in determining the common policies of the supranational entities to which they participate, with the role of such entities reduced to executive secretariats where all decisions are taken by consensus by national leaders according to intergovernmental schemes where each state maintains its sovereignty, similar to those guiding the decisions of the World Trade Organization (WTO). This situation that has been described by political scientists as “State-centrism” of African nations.

On the other hand, the African integration process has been historically characterized by a general resistance by national states to transfer responsibilities to supranational (regional or continental) institutions and by a trend to prioritize national interests over the regional and continental ones. An example are the many cases of African nations that have entered into Free Trade Agreements with third countries or customs territories acting in isolation or even in stark contrast with the interests of other trade formations of which they are part. This is very different from what happened in other realities like the European Union, where the market integration process was driven by strong supranational institutions to which the EU nation-states transferred key decisions regarding the governance of their economies, in the belief that such transferal would have allowed them to achieve more effective economic outcomes. Today, the EU acts as a compact block on the international trade scene, with trade negotiations that are conducted by the EU Commission autonomously, on behalf and in the interest of the EU member States.

But the Modern Diplomacy article also raises another important point. China’s rise was due to the adoption of strategic policy measures, accompanied by substantial infrastructure investments, and significant improvements in human capital. Infrastructure (transport, energy and digital) is vital for trade, connectivity, and resource access, Sachs notes. But in order to be harnessed, it requires significant investments, for instance in the form of electrification projects, construction of transportation networks, and development of fiber-optic communications so to ensure that all parts of Africa are connected and can participate in the global economy. All this is well-known. The real problem is that these investments require massive amounts of money. The real question is therefore: where African States are supposed to retrieve the financial resources needed for their implementation? The answer remains unanswered, but probably this is limitation of the article, which could not treat this aspect for reason of space.

Human capital development is also key for a country’s economic success: everyone is aware of that. And currently, the average schooling in Africa is about six years, which is insufficient for creating a competitive workforce. Hence, the proposal of Sachs is to increase education to an average of at least 14 years, which it is deemed crucial for driving innovation and economic growth in the continent. But again, the implementation of education programmes and the expansion of access to education require substantial investments. Who has to make them? African States, the private sector, or both? And how?

Lastly, another element that Africa should take into consideration for its economic development, is to reduce borrowing costs to fund their development goals without accumulating unsustainable debt. Agreed. But how? Another issue that remains unanswered.