7.1 Diversifying Production through Regional Cooperation

However, the economic benefits of deepening regional integration in view of increasing access to global markets would accrue disproportionately to the leading countries in each of these regional economic communities. For regional integration to work best, these leading countries need to take the lead in the integration process. Ethiopia, Nigeria, and South Africa—being the natural leaders of COMESA, ECOWAS, and SADC, respectively, given their sizes (population and GDP)—might have a key role to play in fostering regional production networks throughout Sub-Saharan Africa (box 7.1).

The 2018 World Bank report, “Reinvigorating Growth in Resource-Rich Sub-Saharan Africa,” expanded on this idea by suggesting that the region

Box 7.1 Diversifying Production through Regional Cooperation

Diversifying an economy is no easy task. Initial phases of diversification in lower-middle-income African economies should rely significantly on strengthening and upgrading existing production and export capabilities from which countries can continuously expand into related higher-value activities. Hence, there is a need for a policy of intensive diversification that builds on existing capabilities.

The alternative—required at higher incomes or in response to even lower-cost competitors—is to jump to higher-value production activities. Even if a country is lucky enough to have such activities close to its production base, the jump remains costly and risky. It may require an available pool of facilities and infrastructures, including physical infrastructure; specific human capital; particular expertise on the demand and tastes of destination markets; and easy, cheap access to specific inputs.

These initial investment needs can be facilitated by foreign direct investment (FDI) inflows. Regional cooperation by providing economies of scale in production and larger markets increases the region’s attractiveness to FDI. In addition, cooperation can provide an outlet for intermediate goods producers who sell to innovating firms elsewhere in the neighborhood.

When Sub-Saharan African exports from 1980 to 2004 are mapped against a global product space of some 800 products (4-digit industries), the Central African Economic and Monetary Community (CEMAC) appears to have only a few options for diversification (wood and its manufactures). Members of the East African Community (EAC) have more options because their exports are more diversified (fruits and vegetables, prepared food, fish, wood and its manufactures, cotton, textiles, low-tech manufactures, metallic products, chemicals, and minerals). Other countries with similar production structures have diversified into such clusters as cotton, textiles, and garments, which currently enjoy preferences under the African Growth and Opportunity Act (AGOA) in the US market. Southern African Customs Union (SACU) members, except South Africa, can gain significantly more than countries in other unions from cooperation in natural resource–based and manufacturing clusters, because they have much easier diversification options driven by the logistics, finance, skills, and infrastructure that reflect their middle-income status.

The volume and diversity of exports grow when countries cooperate regionally in terms of economies of scale, greater factor mobility, and lower transportation costs. To achieve this, there is a need to identify industries or sectors of economic activity—and the associated sector-specific infrastructure—to integrate regional markets with improved access to inputs and markets as well as easier mobility of factors (including labor), enabling a more efficient allocation of resources. That effort can complement the general areas of cooperation in regional infrastructure, better business regulations, and a strong judicial system.

consider several lessons from the development experience of many East Asian countries (Izvorski, Coulibaly, and Doumbia 2018): • Use the advantage of low labor costs and a large domestic labor force that is perhaps just moving out of agriculture in search of employment. • Provide political and macroeconomic stability. • Work closely with foreign investors to arrange for better local infrastructure and access to export routes.

These policy lessons are actionable recommendations for national governments in many areas—particularly in their emphasis on bolstering investment in infrastructure and human capital and improving market and government institutions. Reinvigorating growth in resource-rich Africa will depend crucially on countries’ ability to integrate regionally and hence work in common to overcome the burdens of low density, thick borders, and long distances.

The parallel with the Tigers of East Asia and the next generation of Asian countries is important. The Republic of Korea and Taiwan, China, which have large populations and sizable domestic markets, integrated globally first. They took advantage of the unique international landscape after World War II and into the 1980s, which was characterized by segmentation of countries with endowments of low-cost and high-cost labor, gradual trade integration, fixed exchange rates, and managed capital flows; dedicated US investments that helped shift manufacturing to East Asia; and a robust US security umbrella that contained enmities and fostered trade. For the Asian Tigers, integrating regionally was not practical or politically feasible until the late 1970s. The next generation of East Asian countries to rise economically, such as Malaysia and Thailand, integrated regionally and globally on the basis of a consistent platform of WTO accession and joining the many production chains that started or ended in the Tigers and then shifted to China. East Asia also benefited from abundant, low-cost labor either moving out of agriculture or planning to make the transition.

The current rapid technological advances are producing skill- and capitalbiased globalization that creates unique challenges for resource-rich SubSaharan Africa. Global integration of the region is a must, including through the WTO and by leveraging the AfCFTA. Regional integration must proceed even more forcefully because, except for Ethiopia, Nigeria, and South Africa, the countries in Sub-Saharan Africa have smaller populations, smaller markets, and a smaller middle class than countries in other regions, and they have few attractive investment options that often require scale. Opening the borders will allow positive spillovers from the sectors in which these countries have a competitive advantage. It will also allow the regional champions to intensify trade with their neighbors through the establishment of regional production networks, to build bigger markets, and to access regional and global production networks aside from those in commodities.