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Bid to merge three trading blocs faces disparity threat

Business Daily, Kenya

Bid to merge three trading blocs faces disparity threat

By Allan Odhiambo

13 November 2009

Relative advancement of Kenya, South Africa and Egypt’s economies has emerged as one of the leading threats to the merger of three African trading blocs, trade experts said, citing potential disputes that lie in joining economies that are at different levels of development in a seamless market.

The Southern African Development Community (SADC), the East African Community (EAC) and the Common Market for Eastern and Southern Africa (Comesa) in 2008 agreed to form a free trade area (FTA) covering more than 527 million people with an estimated combined gross domestic product of about $624 billion.

Market system

The partners on Monday inched even closer towards the realisation of their dreams with the creation of a road map to guide the process.

“Gone are the days of multiple membership,” Sindiso Ngwenya, Comesa’s secretary-general, said after a meeting of officials from the three blocs in Dar es Salaam. Tanzania is a member of all three blocs.

“Once you create one single economic space then you become a magnet for investors,” he said, adding that the free trade area would be working in two to three years.

The road map sets out the overall justification for the free trade area and includes a memorandum of understanding to be approved by the heads of state, as well as a draft agreement for the eventual establishment of the area.

But analysts warned that the realisation of an FTA comprising the Comesa, SADC and EAC may run into headwinds owing to the economic and institutional disparities of the 26 participating member states.

“Overlapping products in the regions means that the more developed economies of Kenya, Egypt and South Africa are in a much better position to market their exports. This also raises a concern over possible polarisation as investment may be attracted towards these economies. This has the potential to seriously undermine the proposed integration effort,” Mr Tsidiso Disenyana, of the South African Institute of International Affairs (SAIIA) said in a presentation at the ongoing African economic conference (AEC) in Addis Ababa.

The conference is themed; Fostering Development in an Era of Financial and Economic Crises, and has been organised under the auspices of the African Development Bank (AfDB) and the UN Economic Commission for Africa.

The economies of South Africa, Kenya and Egypt are highly rated in the continent due to high levels of innovation capacity and sophisticated financial market systems only comparable to those of advanced countries in the west.

For instance in the World Bank, African Development Bank (AfDB) and World Economic Forum-driven Africa Competitiveness report 2009, Kenya moved up by six places to position 93, with its key strengths found in the more complex areas normally reserved for countries at higher stages of development.

Kenya’s innovative capacity was ranked an impressive 42nd, with high company spending on research and development and good scientific research institutions collaborating well with the business sector in research.

Supporting this innovative potential is an educational system that—although educating a relatively small proportion of the population compares well with most other countries.

“The economy is also supported by financial markets that are sophisticated by international standards with relatively easy access to loans and share issues on the local stock market,” the competitiveness report said.

Similar prospects apply in the case of South Africa and Egypt that have for decades maintained a firm run as economic powerhouses in the continent.

“This has the potential to seriously undermine the proposed integration effort,” Mr Disenyana warned noting that the imbalance could deny other participating economies the chance of attracting investment.

“The challenges that have been met by the individual RECs (regional economic communities) may be magnified in the larger FTA if not dealt with effectively.”

Within the EAC Kenya’s economic might has on several occasions placed her at loggerheads with Tanzania and Uganda who have accused her of abusing her clout to undermine them.

The institute further pointed out that the fact that the majority of countries in the three regional economic communities (RECs), with the exception of South Africa and Egypt, are dependent on trade taxes for fiscal revenue would amount to a major obstacle for tariff liberalisation.

Trade taxes

“For example, in countries such as Lesotho, Namibia and Swaziland trade taxes account for over 50 per cent of their total fiscal revenue. The proposed trade arrangement may lead to changes in the structure of individual economies that could lead to a contraction of previously import substituting industries that were important sources of revenue,” the instituted said.

Statistics by the Organisation for Economic Co-operation and Development (OECD) showed that in Sub-Saharan African countries trade taxes still account for an average 25 per cent of total tax revenue and where value added tax (VAT) collected at the border often represents more than 50 per cent of total VAT revenues.

“However, this should not be used as an excuse to delay the implementation of the initiative. Care will have to be taken to broaden the effective tax base and seek alternate sources of revenue and if the revenue sources are limited, better expenditure control should be emphasised,” Mr Disenyana said.

The institute also said that political will and stability would be critical in realising the dreams of the grand FTA .

“Political instability in some of key member states including Sudan and the DRC renders the region risky for investment and counter the benefits of the envisaged trilateral FTA,” the institute said.