Trade Blocs African Experience Jan Willem Gunning Vrije Universiteit Amsterdam ERF, Amman, Jordan, March 19, 2017
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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