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Why Trade Costs Matter to Africa

Available in: العربية, Français, Español

African market (trade facilitation)


Resources


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Workshop background paper

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World Bank trade costs and facilitation website

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World Trade Indicators 2008


Africa’s share of world exports down about two-thirds in three decades

June 17, 2008— Global trade and investment has expanded over the past several decades. In Sub-Saharan Africa, however, a region hampered by political instability and governance problems, lack of foreign investment, and other barriers – the opposite has occurred.

Africa’s share of world exports has dropped by nearly two-thirds in three decades from 2.9 percent in 1976 to 0.9 percent in 2006. If Africa’s share of world exports had kept at the same level as the 1970’s its export revenue would be approximately 10 times larger than its current value.

Moreover, while other regions have increased their share of non-oil exports over the last two decades petroleum continues to dominate exports from Sub-Saharan Africa.

Unless African countries expand their participation in international trade, future progress in terms of growth and poverty reduction will continue to be hampered,” said John S. Wilson, a Lead Economist in the Development Research Group at the World Bank.

At a May 31, 2008 workshop in Entebbe, Uganda organized by the World Bank’s Development Research Group and the African Economic Research Consortium (AERC)—an event supported by the UK’s Department for International Development and a Trust Fund project on Trade Costs and Facilitation, over 100 participants from across Africa, Europe, and the U.S. discussed issues related to Africa’s future trade expansion. The specific role of lowering trade costs to expand trade and reduce poverty was reviewed.

After opening remarks by William Lyakurwa, Executive Director of the AERC, and Olu Ajakaiye, Research Director of the AERC, participants discussed key difficulties contributing to high trade costs in the region including; weak infrastructure, geographical constraints, and other barriers to progress.

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The high cost of trade is a major obstacle

High trade costs—for transporting goods and getting them across borders—have a negative impact on prospects for expanding African trade, making producers less competitive.

While reducing tariffs and other trade barriers remains important, and must continue as part of the liberalization process, many African countries will not be able to benefit from reform unless trade costs are reduced, as noted in a workshop paper by Alberto Portugal-Perez and John S. Wilson of the Bank.

Price of crossing a border graph

Click graph to enlarge

Bottlenecks in the form of regulatory and administrative constraints to transport and transit must also be reduced. Customs procedures, duty drawback schemes, and other requirements push up the cost of trade. The World Bank’s Doing Business Indicators reveal that the number of days needed to complete import and export procedures in African countries are among the highest in the world.

Improving the trade-related business climate is a measure that will attract firms into the export market and boost industrial productivity, as argued by Lawrence Edwards, a Professor at the University of Cape Town.

Another speaker at the workshop, Tendie Mugadza, from the University of Cape Town, noted that African trade flows could increase substantially if African countries were to improve trade-related capacity building indicators along three dimensions: institutions, infrastructure and human capital.

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Exports matter for poverty reduction

The fact that high trade costs prevent the full realization of potential gains from trade and can wither the poverty reduction effect of export opportunities, such as high world prices for major export crops or minerals, was noted in a presentation and paper by Guido Porto, an Economist in the Bank’s Development Research Group.

Recent research by Porto shows that exports matter for poverty reduction. Those farmers who are able to grow high-yield export crops are, on average, less poor than those who engage in subsistence farming. In related work, Balat, Brambilla, and Porto(2008) found that households producing export crops, such as coffee, tea, cotton, and fruits in Uganda are less likely to be poor than those not involved in export markets. They find that doubling export participation would reduce poverty by 13 percent.

Examples of measures that can be put in place by the right policies include roads, marketing information, foreign direct investment, and schemes for growers—accompanied by improved access to foreign markets.

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Infrastructure also matters to trade costs in Africa

The workshop also addressed infrastructure and its impact on trade in Africa. Africa is home to fifteen landlocked countries that do not have direct access to ports.

Although Baltimore, a major US port, is about the same distance from Mbabane, the capital of landlocked Swaziland, as from Durban, a South African port, shipping costs of a standardized 40-foot container from Baltimore to inland Mbabane are five times higher than those to Durban.

To overcome the high cost of inland transportation, improvements are needed in two key areas—physical infrastructure (providing the costs are likely to yield significant benefits) and administrative practices and political stability in these countries.

Africa trade story road

A Trans-African Highway Network?

Research by Buys, Deichmann and Wheeler shows that there will be strong trade benefits from investing in and maintaining a trans-African highway network. Their proposed network links 83 major cities and covers a length of about 100,000 km, and could expand trade by $250 billion over 15 years.


Andreas Kopp, a Lead Transport Economist at the Bank, noted the importance of infrastructure maintenance and that underfunding of maintenance in Sub-Saharan Africa between 1970 and 1989 led to an estimated loss of $45 bn. in road asset value. He argued that this loss could have been avoided by spending $12 bn in maintenance.

Work by Njinkeu, Wilson, and Powo-Fosso (2008) referenced in the discussions in Entebbe also illustrate the importance of infrastructure in trade costs. The authors analyze the impact of reform in four categories of trade facilitation efforts: port efficiency, customs environment, regulatory environment, services infrastructure and find that customs and regulatory environment are the main obstacles to intra-African trade.

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Factors that signal future growth in Africa ahead

The workshop explored some of the factors that hold promise of expanded trade opportunities through trade facilitation and lower transactions costs. A number of African countries have been diversifying their exports instead of relying solely on a few raw commodities. Exports are increasingly composed of light manufactured goods, processed foods, and services such as tourism and call centers.

Despite many constraints, there can be good prospects for growth in Africa. Non-oil-exporting countries have been experiencing strong growth, partly because of world price increases for other primary commodities—and prices are not likely to diminish dramatically over the next few years.

Reformers in the region are also moving to lower trade costs, implement regulatory reform, and move forward on regional cooperation to lower trade costs. Continued reform in this area should be part of any development agenda ahead.

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Photo credits: Curt Carnemark, Ppmaker2007 (Dreamstime.com)

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