Tunis Workshop, October 20 – 21, 2005

Introduction

1. The World Bank, the African Development Bank, the Africa Economic Research Consortium (AERC), the Economic Commission for Africa (UNECA), and the New Economic Partnership for African Development (NEPAD) agreed to jointly sponsor a series of five workshops on strategic themes in African development over the next two years.

2. Overall Purpose. The overall purpose of the workshop series is to provide a platform for dialogue on key African development issues and to facilitate the formulation of donor strategies for supporting Africa's development. The workshops bring together, as appropriate, policymakers, analysts, private sector and civil society representatives, representatives of international and regional development institutions, and other experts to discuss critical issues in African development and recommend priority areas for action.  

3. Pilot Workshop in Dakar. The first pilot workshop on Facing the Challenge of African Growth took place in Dakar, Senegal in January, 2005. Participants in the Dakar workshop concluded that raising growth rates could be achieved by diversifying African economies towards manufactured exports (à la East Asian economies), natural-resource based processed exports (à la Chile) or in a few cases services exports (à la India etc).  The participants identified important constraints to diversification including behind-the-border trade policies, market access, late starter positioning, and capacity to export (including supply chains). 

Accelerating and Diversifying Export Growth in Africa

4. Second Workshop in Tunis. The second workshop in the series, hosted by the African Development Bank and the Joint Africa Institute in Tunis, Tunisia on October 20 and 21, 2005, focused on Accelerating and Diversifying Export Growth in Africa. . The World Bank assisted with logistical arrangements and the development of the substantive content of the workshop. The workshop, a logical follow-up to the Dakar workshop, aimed at exploring in greater detail the constraints to export growth and diversification flagged in Dakar. Its objectives were to:

• Encourage the emergence of a triad of public sector champions for the promotion of export diversification and growth - the Ministries of Trade and Finance, and Central Banks, three entities that rarely interact on trade matters.

• Promote the merits of private -public partnerships in scaling up exports and addressing the key constraints faced by the private sector.

• Identify specific actions that need to be taken to drive exports.

• Share relevant experience from those who have succeeded in expanding and diversifying a variety of exports (Chile, Malaysia, and India).

• Identify concrete actions at country level to promote an export push and diversification, mindful of the differences in opportunities and entry points represented by participating countries.

5. After opening remarks by Donald Kaberuka, President of the African Development Bank, and Gobind Nankani, Vice President of the Africa Region of the World Bank on the importance of tradeand exports for Africam gorwth, Session I of the workshop began with  presentations by John Page, the Chief Economist of the World Bank's Africa Region and Hennock Kifle, the Chief Economist of the Africa Development Bank (at the time) on Integrating Africa Into the Global Economy.. Session I also included a discussion of Experiences from Other Countries based on information shared by participants from Chile, Malaysia, and India. The remainder of the workshop agenda was divided into four main areas where action may be necessary: (ii) Addressing Market Access Barriers to Export Growth; (iii) Removing Impediments to Exports; (iv) Addressing Supply-side Constraints - Infrastructure; and (v) Addressing Supply-side Constraints - Trade-related Institutions.

6.This note summarizes the main points made during each session and highlights the key messages from the workshop based on participants' feedback and the closing remarks of Donald Kaberuka and Gobind Nankani.

Key Messages

7. Key messages from the workshop focused on accelerating and diversifying exports; trade facilitation; financial sector reforms; governments and the private sector; investment in infrastructure development; governance and corruption; and regional cooperation.

Accelerating and Diversifying Exports

• Accelerating trade and diversifying exports are key to African growth, but diversification needs more discussion. How should it be done? By whom? Who would finance it?

• Country-specific studies are needed to identify export potential. Africa has a comparative advantage in raw materials to which African countries should add value by expanding the export of finished products.

• Governments should strike a balance between the long term perspective to improve trade and short term need to balance the budget. They should focus on the economic benefits of exports rather than on the tariff revenue.

• Trade must be mainstreamed into national policymaking at the country level, regional level, and continental level and in the IFIs. Donors can play an advocacy role in convincing governments. Trade ministers should be given more importance and authority.

Trade Facilitation

• Trade facilitation must be a priority. African governments need to take a holistic, systems rather than a fragmented approach to addressing issues of trade facilitation. Governments need to find ways to galvanize resources already at their disposal to promote trade (embassies, trade attachés, trade promotion missions, for example).

Financial Sector Reform

• Reform of African financial sectors is critical. Governments should develop local capacity to mobilize resources. Capital markets need to be developed.

Investment in Infrastructure

• Infrastructure is critical to an export push but it should be linked to markets.

• Pension resources could be explored as a way of providing long-term financing infrastructure.

• Proper sequencing of investments in infrastructure and the social sectors is important and must be addressed on a case-by-case basis.

• Country circumstances (not one size fits all) must be taken into consideration when considering government and private sector roles in the development of infrastructure

Government and the Private Sector

• The private sector is the engine of economic development, and governments must consult and work in partnership with it. Although state intervention in the development of the private sector is necessary, it should be temporary and country-specific. An action plan with clear roles for each sector is necessary.

• The private sector needs access to information about markets and to cheap money. An InfoBank for exporters should be established.

• Governments should send strong messages of support to the local private sector. Governments should facilitate the emergence of a critical mass of SMEs in their countries. More effort should go toward improving conditions for doing business. The private sector should prepare itself to be able to meet standards (both in terms of products and management) and compete at a world class level.

• The private sector should have a role in developing infrastructure but it does not yet have the means. Governments and international financial institutions (IFIs) need to look at public/private partnerships and how they might be financed.

• African governments must be more willing and committed to opening their economies, and should focus on creating conditions to attract FDI not just from Europe and America but also from other African countries and Asia.

Governance and Corruption

• Efficacy of institutions, regulations, laws is critical. Issues of governance and corruption must be addressed. Governments must make every effort to create environments that are conducive to FDI in which contracts are honored, property rights are protected, government policy is consistent, and governments can changed peacefully.

Regional Cooperation

• Regional cooperation is critical to trade facilitation with 40% of African countries being landlocked. A regional approach is also key to an export push and to trade negotiations. Regional infrastructure will play an important role.

Role of Donors and IFIs

• The PRSP process needs address infrastructure and trade-related issues. Donors should work with countries in the context of their national development programs and should not be prescriptive.

• The Bank and other international financial institutions need to do more work on EPAs, rules of origin, preferences, the importance of exchange rate policy, how to improve the domestic supply response, and reinforcing Africa's capacity for trade negotiations.

Importance of Trade and Exports for African Growth

8. In their opening remarks, Donald Kaberuka, President of the African Development Bank, and Gobind Nankani, Vice President of the Africa Region of the World Bank emphasized the importance of trade and exports to African growth. Kaberuka predicted that in 2045, countries that will have made a breakthrough will have done so through trade and investment, not through aid.

9. Reinforcing Kaberuka's views, Nankani reported that participants in the Dakar workshop had concluded that without a strong focus on export growth and diversification, there is little hope of achieving sustainable growth in Africa. A recent World Bank study determined that the ability to participate in and take advantage of the global economy was a major contributing factor in the experience of all countries whose economies grew in the 1990s.  Although exports, including manufactured and technology-intensive exports, were growing worldwide in Asia, Latin America and Africa, African countries have not done as well as the average developing countries.

10. Kaberuka cited the Rwandan coffee industry and its loss of market share to Vietnam as an example of what has happened to most commodities produced for export in Africa. Vietnam, which in the past produced less coffee than Rwanda, today produces as much coffee as all of Africa combined, notwithstanding Africa's access to preferences in European markets.  African governments and businesses need to change the way they do business. The general attitude towards trade and competition needs to be re-examined. Many Africans entrepreneurs, supported by governments, take the short-term view that competition is bad and that barriers to imports must be erected to protect domestic industries. They do not see the trade-offs between short-term losses and long-term gains.  The role of trade ministers also must be given more importance in African governments.   Kaberuka announced that in future the ADB would focus more on addressing trade issues and related capacity building needs.

11. Nankani suggested that it would be useful to look at the investment side of the export diversification question. Citing recent data on firm level performance, he noted that:

• the variance in performance across firms in a given country is as high as the variance in performance across countries in terms of performance.

• firms that are exporting have much higher productivity gains than those that are not exporting.

12. Nankani said that some key questions for workshop participants were:  Why can some African firms achieve world-class standards and succeed while others cannot?  What lessons can workshop participants  learn from the experiences of successful firms in other countries?

Session One: Integrating Africa into the Global Economy:

Overview

The Chief Economist of the World Bank's Africa Region, John Page, and the Chief Economist of the Africa Development Bank, Hennock Kifle identified a number of critical factors affecting Africa's integration into the global economy including the magnitude of Africa's growth challenge; export performance and rate of growth; market access; and "behind the border constraints". A key issue that emerged from the presentations was that more attention needs to be given to why some African countries are failing. They concluded that behind-the border conditions in many African countries are a major constraint on the ability of exporting firms to compete in world markets.  

13. Magnitude of Africa's Growth Challenge. According to projections for per capita growth in Africa between 2006 and 2015, it seems highly unlikely that the millennium development goals (MDGs) for poverty reduction or human development can be met without a substantial increase in the rate of economic growth.  Given African countries' diverse growth experience, the challenge is to find model countries where growth can be accelerated and some or all of the MDGs achieved by 2015. 

14. Trade, Export Performance, Rate of Growth. Africa needs an export push. Trade presents opportunities for African countries to expand markets regionally and globally. Besides yielding productivity growth, an open economy puts pressure on national enterprises to learn, improve management, and  upgrade technology.   Trade contributes to productivity growth in another "win-win" way - through the expansion and diversification of non-traditional exports. Strong links between purchasers in advanced economies and the producers in low income countries help ensure that best practices are transmitted to companies trying to compete in the global economy. 

15.  On a global scale, increases in per capita GDP are positively correlated with increases in the share of exports as a percentage of GDP.  Empirical data from Africa indicate that between 1985 and 2003, African countries with a decreasing export share in GDP experienced declining per capita incomes. Countries with an increasing share of exports in GDP experienced an increase in per capita GDP of about one percent. Africa's trade performance as a share of global GDP has declined almost continuously since the late 1970s - from about 3% to 1.5%, with income declining correspondingly.

16. Trade experience among African countries is diverse, with some countries taking advantage of trade preferences and improving their trade performance while others are not.  Countries like Kenya, Uganda, Ghana, and Botswana are beginning to move into more non-traditional exports. However, looking at the overall index of diversification, most African countries are still dependent on two or three commodities for the bulk of their exports.

17. Constraints on Africa's Export Performance. What are the constraints on Africa's export performance?  Levels of protection across the continent are not very different from the rest of the developing world. In fact, they are on average, less than those in Latin America, MENA, or South Asia. Page argues that while the domestic trade regime is important for determining the incentive to invest in exports, it is not the most important determining factor, nor is market access, which is also important.. He and Kifle acknowledge that African countries have failed to take advantage of preferential trade agreements and are still failing to attract large volumes of FDI.  Both speakers agreed that external barriers to trade are not the key constraints to export growth in Africa.  Behind-the border factors are the major constraint on African counties' ability to compete. African firms, although able to produce a product at the same cost at the factory level as a Chinese firm, cannot deliver it to markets in North America or Europe at the same cost as the Chinese producers because of behind-the-border constraints.

18. Countries with stable macroeconomic policies that have implemented major structural reforms to improve the investment climate are clearly doing better in terms of growth and export performance than those that have not.   Thus while trade policy reforms are important and necessary for accelerating exports and economic growth, they are not sufficient in themselves. They must be part of a larger package of reforms to affect export acceleration and economic growth.

Experiences from Other Countries

19.  One of the objectives of the workshop was for participants to hear about  relevant experiences in countries that have succeeded in expanding and diversifying a variety of exports. Resource persons from Chile, India, and Malaysia discussed the factors that had influenced their countries' success in this regard.

20. Rolf Lüders, Professor of Economics, P. Catholic University of Chile, recounted the Chilean experience in making the transition from an exporter of primarily raw materials to an exporter of processed goods. Jagdish Raj Bhandari, Vice President, Tata Consultancy Services (TCS) and Cheng Ping Keat, Group Chief Executive Officer, Khind Holdings Berhad focused on their companies as leaders in the process by which India and Malaysia successfully diversified their economies and evolved into major exporters of services and manufactured goods .

21. The Chilean Case. Lüders identified three key factors behind Chile's export success: creating conditions for an overall efficient and competitive economy, including the elimination of rent-seeking; maintaining a sound macro-economic policy; and eliminating an import substitution bias.

22. The transformation of the Chilean economy took place under a model that did not necessarily favor exports. The government aimed for a neutral economy in which resources were allocated most efficiently with no discrimination among sectors or agents. Government only played a role of correcting for externalities.  In terms of trade policy, this meant that there was no discrimination among sectors or agents, or between tradeables and non-tradeables or even among tradeables (imports and exports). The approach implied a reduction in trade restrictions of all kinds. Until 1973, Chile had a system of import substitution with averages tariffs of about 90%. Exports were 8% of GDP in 1970. Up to 1974, industrial goods processes were protected by 49% tariffs. Mining products were penalized by 32%; agriculture by 21 percent.  After 1973, exports became the main engine of growth. Today they are 28% of GDP. As the share of exports in GDP rose, exports were diversified. 

23. Today Chile has an open market economy in which the state plays a subsidiary role. The private sector and exports drive the economy. Tariffs average about two percent.  Ruders explained that there was an empirical relationship between low tariffs/trade liberalization and growth. By reducing effective tariffs to a very low level and evening them out, Chile encouraged growth.  The reduction of tariffs went hand in hand with reducing expenditures substantially and raising revenues from other sources.   Chile also diversified its supply of exports products (wine, copper, fish products, iron, grapes, etc.). The share of mining decreased while that of agriculture and manufacturing (processed raw materials) increased substantially.

24. Chile exports about 4000 products  Within each exporting industry there are only five to ten exporters, and each is big. Foreign investment in Chile is not discriminated against, but the main export producers are Chileans. In most industries except copper, most production is by small producers. The role of the exporters is to provide technical know-how and market access. The government does not play a significant role except to help gain access to markets through trade agreements.

Factors Contributing to Chile's Successful Diversification

25. The Chilean export model evolved under the following favorable conditions .

• Macroeconomic balances are maintained. The real exchange rate is maintained at a high level, resulting in the depreciation of the local peso, and providing an incentive for exports.

• Government played and plays a supportive role. Government subsidies are limited to the poor and do not extend to the productive sectors.

• Policies are non-discriminatory - neither for nor against exports.

• Trade promotion programs do not play a major role in the Chilean experience.

• The current model is based on the export of primary products, many of them processed.

• The relatively high average level of education among Chileans makes it easier to develop the private sector.

• Most producers are Chilean.

26. India Case. Jagdish Raj Bandhari, Vice President, Tata Consultancy Services (TCS) focused on  the growth of the service industry in India and how it has led to the growth of  IT-enabled services in India. In his view, the model could be replicated by African countries, and policymakers should consider the possibility of moving directly from a focus on agricultural production to a focus on the service industry, even if the manufacturing sector is not well-developed. 

27. The Indian IT services sector is one of the fastest growing in India. Its contribution to national economic output tripled from 1.2 % in 1997- 98 in 3.5% in 2003-2004. The number of IT and IT-enabled professionals employed in the industry grew from 284,000 in 1999-2000 to over 1 million in 2004-2005. The industry began in 1968 when TCS was founded by the TATA Group. The government did not intervene in the beginning as it did in other sectors. There were tax benefits for exports but no benefits for the import of hardware, etc.

28. The Tata Group started doing off-shore work in the 80s by setting up a major center in India. Liberalization in 1990 began attracting investments. From 1990 - 2000, the number of multinational companies in India increased sharply as companies realized the cost advantages of establishing development centers in India. In the last five years, every major IT company opened a shop in India. Every major IT user in the US is starting its own center or collaborating with a major company that has a center in India. Indian companies are becoming multinational companies by opening centers in other countries. IT-enabled services (call centers, etc.) are growing much faster than IT software services.

29. In the early 1990s, the government began creating software technology parks (STPs).   All types of goods including hardware and software for the services targeted for export could be imported duty-free. The government announced a special policy for call centers in India under which there is single-window clearance for software exporters. The government also moved very fast to upgrade India's telecommunications infrastructure over the last decade.

Factors contributing to Tata Group's Success:

30. The Tata Group's success  as a leader in India's drive to become an exporter of services can be attributed to a number of factors including:

• abundant supply of low-cost skilled manpower;

• key government role in investing in infrastructure facilities;

• stable economic and political environment;

• modification of copyright law to include software

• passage of an IT Act in 2000 allowing 100% foreign equity participation without restrictions. Partnerships not restricted to locals.

31. The Malaysia Case. Cheng Ping Keat, Group Chief Executive Officer of the Khind Holdings Berhad, explained how Malaysia evolved from an exporter of raw materials such as tin, rubber, palm oil, and timber at the time of independence to its current status as a major exporter of electronics, among other products. In 2004, Malaysia's exports totaled US$126 billion of which 78% came from the electrical and electronics industry

32. Khind Holdings Berhad started as a small retailer of electrical and electronic products in 1961. It ventured into manufacturing in the late 70s and expanded in the 80s. The company began to export in 1988 with the help of the government. Its participation in overseas exhibition trips helped to open doors. The government provided "cheap" money to set up manufacturing facilities. Businesses could also import tools and machinery duty-free and   obtained grants to set up ISO systems.

Factors Contributing to Malaysia's Success

33. The factors that contributed to Malaysia's fast growth from per capita income of less than $600 in the 1960s to about $4000 in 2004 included:

• A stable political environment, including smooth transitions when prime ministers change. Prime Minister Mahathir was the prime driver of growth from 1981 to 2003.

• Macro policies aimed at providing employment, stimulating economic growth, diversifying industry, increasing competitiveness of Malaysian industries, and helping to build the Malaysian brand.

• Availability of FDI. Right after independence, an import substitution model was in effect. Like Chile, tariffs were high. In the 1970s and 1980s, the government began to actively court foreign investors, developing re-export policies to encourage foreign companies to come to Malaysia, building new facilities to provide a more conducive environment for manufacturing exports or storing re-exports, and establishing free trade zones in which inputs could be imported duty-free. Foreign investors brought technical and marketing expertise which Malaysians learned fast.

• World class physical (transport, ports; energy), telecommunication, electricity, and banking/financial infrastructure.

• Malaysia's multi-cultural and multi-religious traditions.

• Lack of competition from China during Malaysia's economy growth spurt.

Discussion

34. The three presentations confirmed that the national private sector needs to play a fundamental role in developing and diversifying exports.  The government's role was less important in Chile than in the other two cases. Its main contribution was creating space for private sector and foreign investment. In contrast, the government was an important catalyst in Malaysia and India.

35. In response to a question about how Chile developed local exporters in its export push, Lüders clarified that Chile historically always had a private sector operating in a market economy, albeit inefficiently.  The high average level of education was important in favoring the rise of the private sector. 

36. Chile also reduced tariffs while drastically reducing government expenditure and developing other revenue sources. The entire process of reducing tariffs and evening them out took about 5 years.

37.   The problem of cheap Chinese manufactured products invading African markets and stifling local production was raised. The key factor in Chile was the high exchange rate.  By keeping the exchange rate high, Chile ultimately created an equilibrium between imports and exports. Appreciation of the local exchange rate should be avoided if African countries wish to replicate Chile's experience.  Donors will need to be mindful of the potential effect on the exchange rate of external financing.

Session II:  Addressing Market Access Barriers to Export Growth

38. Most African countries receive preferential access to major export markets.  For some countries, and sectors, preferences are argued to have been critical in the development of new export industries.  These impacts may be limited, however, by restrictive rules of origin and product exclusions.  Indeed, evidence suggests that the impact of preferences has been limited. For 42 of 47 Sub-Saharan African countries, preferences amount to less than 10 percent of the value of their exports (and for 17 countries, the figure is less than 1 percent.)

39. A more important issue than the impact of preferences may be the impact of preferences and the structure of protection in rich country markets on, for example, sourcing decisions for inputs and the level of processing that can be undertaken in-country. Has the structure of rich country protection distorted patterns of comparative advantage? What are the implications of these distortions for the sustainability of export industries encouraged by preferential access, given the inevitable erosion of preferences over time as MFN tariffs are reduced?

40. MFN liberalization potentially creates important opportunities for African exporters to expand into new markets .  But African countries also remain under-utilized markets for each others' exports. While intra-regional trade accounts for 17 percent of GDP in East Asia, it is a mere 3 percent of GDP in Africa.  The EPA process offers African countries an opportunity to lower barriers to trade amongst themselves and to take a regional approach to creating economies of scale.

41. Richard Newfarmer, Economic Advisor in DECPG, World Bank, postulated that barriers to Africa's exports in foreign markets probably account for a small portion of the region's lagging export performance.  "Nonetheless", he said, "now is a propitious moment to challenge these barriers in global and regional trade negotiations and use these to leverage domestic supply side reforms." 

42. Newfamer outlined four areas in which Africa could and should be more assertive in the global market place:

• seeking non-restrictive rules of origin;

• accelerating regional integration by reducing restrictions on intra-regional trade;

• using the EPA negotiations to promote access and regional trade; and

• pressing for an ambitious Doha round.

43. Non-restrictive Rules of Origin.  Although all major rich countries grant preferences to developing countries, their value to most African countries is very small, largely because of rules of origin. Thirty-five of forty-eight countries derive less than 5% of the value of their exports as a result of these preferences.  While on the one hand, rules of origin are designed to prevent easy access of goods from Taiwan through Ghana, (for instance), at the same time, they can also be used by import groups in the rich countries to prevent access. This means that a clothing exporter in Africa cannot get the textile input for that manufactured clothing product from its cheapest source.  There is abundant evidence that rules of origin, when they are most restrictive, can impede participation of African producers in the global market, particularly in emerging networks around the world.

44. Restrictions on cumulation, i.e. what can count as value added to have credit for access to preferences, can also impede participation. If cumulation is only with the most inefficient producers (such as neighboring country) rather than with the most efficient Asian producers of textiles, there is no preferential access. This discourages labor-intensive manufacturing and diversification. Whereas rules of origins under AGOA have allowed a significant increase in level of imports of manufactured clothing from Africa, EU rules are very restrictive and clothing imports from Africa have been stagnant.

45. African countries now have opportunities to be more assertive. The EU is preparing to revise more than 500 rules of origin under GSP. African trade negotiators should put forth a public position to the EU Trade Commissioner, Peter Mandelsohn, indicating that African leaders support the Blair commission's rule of 10 percent as a way of making preferences work. AGOA preferences on clothing will expire in 2006. If the US were to adopt the same criteria and expand coverage to non-LDCs of Africa, the value of US preferences would increase. Less restrictive rules of origin would spur both export diversification and global integration because African exporters could source globally for the most competitive products.

46. Doha Round. A more proactive stance by Africans in Doha Round negotiations could influence the discussion in a positive way. The myth is that Africa will not benefit from a successful Doha Round because food prices will rise and they will lose preferences in the market. A detailed study shows that Africa will benefit strongly because while it might lose in terms of trade, it is much more likely to benefit from expanding exports around the world.  Doha is the only way to take on the issue of tariff peaks, of escalating tariffs, of specific duties and impeded access to the Asian market, which is taking on increasing importance.

47. Economic Partnership Agreements (EPAs) are an opportunity to gain full access to European market which amounts to about 60% of Africa's trade. It will, however, be important to avoid the EU being granted preferential treatment to African markets before regional integration actually has occurred or before MFN tariff peaks have come down. This will occur if the EU is allowed to set the rules agenda, the agenda for services liberalization, agenda for competition policy, the agenda investment.  Africa needs to link the external negotiations with EU to its own regional integration interests.

48. Aid for Trade. The Blair Commission and recent discussions in the G-8 have put forward a new initiative on aid for trade.   African trade ministers have an opportunity to take a strong, unified position on how this aid should be used. One important area to address could be how standards may impede access of African products to export markets.

Discussion

49. The discussion that followed focused on: Non-tariff barriers (NTBs) to African trade including voluntary regulations; the role of IFIs in trade negotiations; the export of services, particularly in Mode 4; and preferences.

50. Non-tariff Barriers. Participants concurred that African negotiators need to be more aggressive about non-tariff barriers, particularly voluntary regulations such as health and safety standards that inhibit market access. For example, exports of Kenyan and Rwandan horticultural products and fruits and vegetables to European markets are hindered by voluntary regulations such as social responsibility audits which, though not written, are becoming the norm. Small growers cannot afford the expense of compliance.  A code of conduct may be necessary to address the problem, and it was suggested that this was a possible area to which aid for trade could be applied. African countries also need to put up a united front to engage companies like EuropGap on standards.

51. Trade Negotiations. Participants recommended that the World Bank, IMF, and ADB be granted observer status at the ministerial level meetings of the WTO to provide support for African negotiators who lack the necessary expertise. Nankani acknowledged the World Bank could do more on capacity building for trade negotiations. If countries requested specific assistance with WTO negotiations, the Bank could look into it

52. Participants said that African negotiators must be more aggressive when discussing Mode 4 (which covers the temporary movement of personnel), and linking it to proposals in other modes, when discussing the export of services. The observation was made that existing opportunities (e.g. call centers in Ghana) under Mode 1 and Mode 2 are being threatened by more than 80 bills before various US state legislatures to reduce state expenditures on outsourcing.  

53. . In general, participants recommended that Africans to try to put up a more united front when conducting trade negotiations rather than approach them as individual countries.

54. Preferences. Newfarmer explained that although in theory  preferences could lead  a country to develop an industry in which it would have no comparative advantage once the preferences were removed, this was unlikely to be the  experience for most countries (e.g. Bangladesh seems to be doing pretty well even though its preferences have been removed). The reason for their success seems to be that they seem to be moving into niche markets with links to production networks, which is crucial for participating in the global market place.

55. In summary, participants concluded that diversification is key to Africa's making a major breakthrough in international trade.  This, coupled with other ambitious trade-related reforms by African countries, will be necessary to maximize benefit both from preferences and from DOHA.  Outsourcing (as in Ghana), greater trade with Asia, and processing of natural resource products were also recommended as areas with substantial potential for growth in Africa. More analytical work by IFIs on trade escalation issues and greater advocacy for South-South trade will be helpful.  

Session III: Addressing Supply-Side Constraints - Infrastructure

56. Infrastructure is a critical intermediate input for production and facilitates movement of people and goods across frontiers. Successful trade diversification will require an efficient infrastructure system. Export growth in Africa can be constrained by lack of essential infrastructure: both the physical infrastructure to bring goods to markets - such as roads and ports - and lack of access to high quality and low cost infrastructure services, such as telecommunications, finance and energy.  Absent or poor quality infrastructure undermines the competitiveness of African exporters by increasing the costs of input services, or by increasing the costs of bringing goods to market. 

57. Experience has shown that private markets do not provide adequate physical infrastructure, thus requiring the public sector to invest to fill the gap.  The burden on governments in providing this infrastructure may be reduced, however - for example, by exploring the scope for regional cooperation or economies of scale.  The recent creation by the World Bank, ADB, G8, AU/NEPAD, ECOWAS, and EC of the Africa Infrastructure Consortium may be a promising solution to the challenge of financing infrastructure.  

58. Africa faces unusually high transaction costs related to inadequate infrastructure. Freight cost as a percentage of total import value in 2001 was 13% for Africa compared with 8.8% for developing countries (UNCTAD, 2002).  Poor infrastructure adds to the cost of doing business in Africa.  

59. Key constraints to infrastructure development in Africa include:

• Vast distances and low population density

• Underdeveloped financial markets

• Inefficiencies associated with public sector provision of infrastructure services because of weak institutional capacity.

60. According to the Blair Commission, $20 billion a year at a minimum is needed to reverse Africa's lagging infrastructure indicators. Increased public sector spending, public-private partnerships, and a concerted effort on the part of the donor community are possible means of addressing the problem.

61. Mohammed Salisu, Principal Research Economist, ADB, discussed the implications of poor quality infrastructure for Africa's export performance and highlighted options for addressing key constraints to investments in trade-related infrastructure in Africa.  Among others things, he stressed the need to create sound regional regulatory institutions and legal frameworks and develop better management and maintenance policies (at both national and regional levels).  A harmonized regional/continental approach to infrastructure is also important for both export growth and regional integration.

Discussion

62. The ensuing discussion focused on several issues including the optimal sequence of investments in infrastructure, health, and education; the consequences of inadequate infrastructure; and best practices to resolve infrastructure bottlenecks.

63. Sequencing Investments in Infrastructure and Health and Education. Participants discussed whether more resources should go to infrastructure than health and education, especially since  returns on investments in health and education are 7 to 15 years away in the medium term, and spending on human development (HD) has macroeconomic implications for trade and exports.  It was noted, however, that whether to spend on infrastructure development or to spend on health and educational services are not "either/or" questions but are complementary. Educational and health services cannot be provided efficiently without adequate infrastructure.  Furthermore, education is a prerequisite for economic diversification.  A World Bank study on Ethiopia's spending to meet the MDGs by 2015 tested the efficacy of two policies - one was HD-intensive and the other focused  initially on infrastructure with a gradual shift to HD, The second policy proved superior in terms of impact, indicating that infrastructure plays a critical role together with HD.

64.  Governments, Infrastructure Development, and Export Diversification.  Participants discussed efforts by African governments to address infrastructure issues and tried to understand why the results were often not successful. Some suggested that maybe government neutrality was being interpreted too literally and that trade ministries and trade promotion were not being given sufficient prominence.

65. A participant suggested that policy reforms have not been effective in Africa because of the fragmented approach that is usually taken by governments.  Rather than taking a holistic approach, most African governments develop a shopping list of issues/problems such as customs operations or banking services that is parceled out to different institutions and agencies which subsequently address the issue from a relatively narrow perspective.  In contrast, Mauritius has been successful by taking a logistics project approach to addressing challenges. Instead of looking at infrastructure development in isolation, the focus on infrastructure should go hand in hand with resolving specific constraints and targeting specific markets.

66. The private sector's capacity to address Africa's infrastructure needs is constrained by the fact that the African private sector is comprised mainly of SMEs and microenterprises. Efforts to support the private sector through financial assistance, tariff reduction, tax holidays, and training, which have worked in other countries, have had a high failure rate in Africa. Despite everything that has been done, there remains a lot to do to improve conditions for doing business in Africa. The appropriate policy environment needs to be created for public-private partnerships to be successful.

67. Several private sector participants described the impact of inadequate infrastructure on the development of their businesses in particular and on the development of the private sector in their countries in general. They said:

• Mounting fuel and energy charges, unstable electricity supplies, lack of government support for diversification , all compounded by corruption detract significantly from the bottom line of firms that are already struggling.

• Lack of strong financial systems deprives the private sector of the support it needs to flourish. Governments are unable to fill this gap because they lack the necessary resources.

• In Rwanda, the Government's failure to deliver on promises to provide cold rooms at the airport and its refusal to allow the private sector to do so hampers the local horticulture business.

68. In contrast, other participants cited examples of successful efforts to resolve infrastructure bottle-necks :

• The Ugandan Government initiated a public/private partnership to transport maize (through a multi-modular transportation system) to Zambia and Malawi to alleviate the effects of a famine in 200.Sixteen farms supplied the maize. The government provided soft funds to pay the farmers and space to store the grain. Railway sidings were built in record time. Against all odds, the maize arrived in Zambia and Malawi, and a permanent trade channel was opened as a result.

• The Kenyan Government established a horticultural development center (funded by JICA) at and around the Nairobi airport with a network of extension workers to help the farmers as well as a fleet of refrigerated trucks. SMEs used this facility as an incubator for a small user fee.

• The Tanzanian private sector is involved in formulating policy and reforms and making policy decisions that are conducive to attracting FDI.

• The reform of Chile's social security system through privatization provided a source of long term capital to allow many Chileans to go into the business of providing utilities and roads, etc.

69. Key Messages.  Key messages from session III include:

• country circumstances (not one size fits all) must be taken into consideration when considering government and private sector roles in the development of infrastructure;

• the PRSP process needs to factor in infrastructure and trade-related issues and donors should work with countries on their own development programs and should not be prescriptive.

Session IV: Removing Impediments to Exports (from a Policy Perspective)

70. Export growth and diversification can be promoted by the removal of policies that create disincentives for firms to enter international markets, e.g. policies aimed at lowering costs, increasing the variety and quality of inputs, and encouraging FDI.  Reforms since the 1980s have significantly reduced export taxes, prohibitions and restrictive import quotas as well as border barriers in many countries in Africa.  But there is still more to do: the average tariff still masks individual tariffs as high as 100 percent for both agriculture and manufactures, and significant non-tariff barriers remain.  Additionally, liberalization of services has lagged behind that of goods, with investment restrictions limiting competition in a number of key service sectors. 

71. Ademola Oyejide (in a paper presented by Olu Ajakaiye) maintained that the emphasis on import liberalization in the structural adjustment period resulted in exporters' needs being neglected.  On the investment side, liberalization of investment policies (privatization, encouraging foreign investment, etc.) has failed to bring in investors because of a myriad of practical constraints on the ground (infrastructure, electricity, roads, property rights issues, etc.).  The focus should now be on going all out to encourage exports ("export push").  Countries need to devise their individual strategies to stimulate the appropriate country-specific supply responses conducive to exports. To accomplish this, there must be investment in several different domain including infrastructure and human resource development. Regular consultation between the public and private sector is also be key.

Discussion

72. The ensuing discussion focused on the following issues: putting exports first; the need for consultation in policymaking; and  promoting good governance and combating corruption.

73. Putting Exports First. The resource persons from both Malaysia and Chile confirmed that in their countries, the government had focused on promoting exports to stimulate rapid economic growth. In Malaysia, a three-pronged policy was followed, beginning with the setting up of free trade zones near the ports to attract foreign companies, followed by the establishment of licensed and bonded warehouses, all of which was underpinned by procedures to permit duty free importation for local and foreign companies.. The successful Mauritian experience of allowing foreign importers to set up offices in Mauritius was cited.

74. Participants emphasized the need to strike the right balance between an export focus and facilitating essential imports.  Imports and exports are two sides of the same coin.

75. Stimulating exports is often difficult because there is no export base in the country.  Credits and financial subsidies can be a way of stimulating specific exports as in the Asian experience. The  failure of development banks to stimulate exports was cited (bad loans, dependence on government subsidies, etc.). 

76. Consultation. While agreeing that it would be impractical to always strive for a consensus, participants stressed the need for governments to consult with stakeholders in the private sector, including SMEs, to ensure that the policy-making process takes account of their needs. Small companies usually face the greatest constraints, especially in terms of financing, access to credit, etc. Addressing their concerns is critical to successful export diversification. At the same time,  the private sector must be mindful of not sacrificing the greater social good in pursuit of its business agenda. 

77. Governance and Corruption. Participants stressed that the effort to remove impediments to trade needs to be linked to the governance issue, given that corruption is a major impediment to diversifying exports and enhancing export performance.

Session V:Addressing Supply-side Constraints -Trade-related Institutions

78. Competing in international markets requires an efficient and well-functioning machinery for trade, from customs which allow for the smooth entry and exit of goods across borders, through export support institutions which provide information on access opportunities and conditions in key markets, to institutions which assist exporters in meeting, increasingly demanding standards in export markets. 

79. Hakim Ben Hammouda (ECA)  approached this topic from the perspective of trade facilitation, focusing on the following aspects:

• Physical movement of goods

• Import and export procedures

• Application of new technologies to procedures

• Payments, Insurance and financial procedures

• Standards of international commerce

Studies have demonstrated that those countries that have made great progress on trade facilitation are generally those that have succeeded in stimulating a sustained export push and in diversifying exports (e.g Mauritius, Egypt, Tunisia, Kenya). Trade facilitation yields important benefits.

80. According to ECA research findings a 10% reduction in phone costs translates into an 85% increase in bilateral commercial flows, and a 1% reduction in maritime and transport costs in Asia resulted in a GDP increase of $3 billion. In Africa, impediments to trade include excessive customs formalities, complicated payments procedures, excessive road blocks, inordinately long, costly, complicated and often untransparent and unpredictable clearance procedures.  Trade facilitation will be as important for north-south trade as for south-south trade and intra-African trade.

81. Hammouda identified the following as areas in which African governments could take quick action (at relatively low cost) in the near future to facilitate trade: removal of road blocks; facilitation of customs regulations and clearance procedures through creation of a one-stop window for both importers and exporters; construction of roads and their maintenance; utilization of ICT procedures; and facilitation of payments procedures.

Discussion

82. The ensuing discussion focused on examples of specific trade bottlenecks, best practice cases of trade facilitation, and steps that African countries might take in the future.

Examples of Trade Bottlenecks

• Goods can take10 days to be transported from Dubai to Mombassa Port but 6 weeks from Mombassa Port to Kigali. (It was reported that since the recent creation of a paperless system, goods are being cleared faster in Mombassa Port)

• Existence of over thirty road blocks/controls between Dakar and Bamako

• The prohibitive cost ($800) of flying from Nairobi to Kigali, a 45 minute journey.

• South African Airways has tried unsuccessfully to obtain landing rights in Nigeria for past twelve years, while British Airways and Virgin Air fly in with no difficulty.

• Policymakers commit to regional and international agreements while abroad and are unable to implement them at home because of limited financial or other capacity.

Examples of Successful Experiences with Trade Facilitation

83. In Chile a high level committee of ministers and representatives from the private sector was appointed specifically to facilitate trade. The committee met regularly to discuss problems and proposed solutions that were acted on expeditiously. The Chilean government also permitted US customs inspections to take place in Chile.

84.  In Malaysia, the Malaysia Export Trade Center was set up by the government to promote Malaysian exports. The Malaysian Government has representatives in major world cities serving as contact points for overseas buyers and for exporters. The government also provides training, research, and marketing assistance to exporters.  The Prime Minister and the Minister of Industry and Trade organize overseas trips for business people and mount trade exhibitions to promote Malaysian exports.  The Malaysian Export Credit Insurance organization helps to insure Malaysian exporters against risks not normally covered by insurance companies and extends credit to overseas buyers who want to buy Malaysian products.

85. The South African trade facilitation program established through SACU has resulted in free trade between the five member countries.  An effort is being made to expand the program to SADEC countries and ultimately also to COMESA countries.

86. The TTN (Tunisia Trade Net) single window program, implemented with World Bank funding, is a model for other African countries.

87. The Ghana Gateway Commission established by the government brought together, under the chairmanship of the Vice President, the heads of customs, Ghana Ports and Harbors, and the Association of Professional Exporters to brainstorm on trade problems and propose solutions.

88. The Gambia took advantage of trade liberalization and implemented reforms that led to a flexible exchange rate and  a significant reduction in red tape at the customs and ports (goods can be cleared from ports within two days).  This led to a quantum jump in imports which are re-exported to other countries in the region (60% of  imports on-sold to other countries).

89. Regional Cooperation. Regional partners must recognize that improving transit trade is a collective responsibility. In addition to improving customs, nations should focus on developing regional transport systems.  Participants stressed the importance of benchmarking the improvements desired and monitoring progress toward achieving them.

90. Looking to the Future. Participants agreed that country circumstances permitting, allowing foreign private sector partners to get involved in service provision (privatization, air transport, etc.) could be an option worth exploring to increase competition, promote efficiency, and lower costs. 

91.  Participants suggested that African pension funds could be a rich source to tap to mobilize the long-term financing necessary to address trade facilitation issues, especially since raising bonds now through existing infrastructure (as in Chile) would be prohibitive, imposing onerous charges on the private sector and making firms less competitive because of higher costs.

92. There was general agreement among participants that a critical look should be taken at the role being played by Trade Promotion Agencies, financial institutions and trade insurance institutions in Africa? Are they fulfilling their prescribed role effectively and efficiently? If not, what needs to be done?

93. Participants encouraged IFIs to do more work on cross-border trade. Nankani proposed, as a follow-up to the workshop, working with the five EAC countries to identify trade bottlenecks, which could then be addressed through a coordinated response supported financially by the World Bank, and maybe ADB, the EU and other donors.

94. Given the multiple bottlenecks and multiple agencies involved in trade facilitation issues, it was suggested that regional governments take a holistic, systemic approach using a short, medium, and long term road map.