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Five lessons of regional integration from Asia, America, and Africa

Sanjay Kathuria's picture
More than 50% of today’s international trade goes through regional trading arrangements.  While trade is a critical component of regional integration, integration has several other dimensions including energy cooperation and intra-regional investment, to name a few.  After carefully examining cases of regional integration in Southeast Asia, the Americas and Africa, we present five lessons for South Asia.

Lesson 1: Facilitate trade in goods and services

Despite falling tariffs, there is still a large gap between the price of the exported good and the price paid by the importer, largely arising from high costs of moving goods, especially in South and Central Asia. On a percentage basis, the potential gains to trade facilitation in South and Central Asia, at 8 percent of GDP, are almost twice as large as the global average. High trade costs have contributed to South Asia being the least integrated region in the world.

FIGURE 1: Intra-regional trade share (percent of total trade), 2012

In the ASEAN region, most countries have established either Trade Information Portals or Single Windows that have enhanced trade facilitation, reduced trade costs and enhanced intra-regional trade. A Trade Information Portal allows traders to electronically access all the documents they need to obtain approvals from the government. A Single Window (a system that enables international traders to submit regulatory documents at a single location and/or single entity) allows for the electronic submission of such documents. These single windows, using international open communication standards, facilitate trade both within the region and with other countries using similar standards.

In services, one barrier to trade involves the movement of skilled workers, accountants, engineers and consultants who may move from one country to another on a temporary basis. The Southern Common Market (Mercosur)’s Residence Agreement allows workers to reside and work for up to two years in a host country. This residence permit can be made permanent if the worker proves that they can support themselves and their family.

Better trade logistics could jump-start Africa’s light manufacturing industry

Ankur Huria's picture

Zambia-Zimbabwe border crossing. Photo - World Bank.Labor-intensive, light manufacturing industries led the economic transformation of some of the most successful developing countries in the world, including China and Vietnam. In Sub-Saharan Africa, that was simply not the case.  The region’s share of the global light manufacturing market has declined to less than one percent since China’s emergence in the 1980s. Nevertheless, a review of recent trends in exports suggests that some East African countries –Ethiopia, Kenya, Tanzania, Uganda and Zambia – are making headway in light manufacturing industries.

According to the World Bank Group’s 2011 report, “Light Manufacturing in Africa,” the global trading environment “favors Sub-Saharan Africa if it can overcome key constraints in the most promising subsectors.” Those subsectors include the manufacture of food products and beverages; apparel and the dressing and dyeing of fur; wood and wood products; luggage and the tanning and dressing of leather; and fabricated metal products. Sub-Saharan Africa enjoys low labor costs and abundant resources, as well as preferential trade access to US and EU markets for light manufactures. Despite these advantages, the competitiveness of Africa’s light manufacturing industry continues to be undermined by the costs of importing and exporting intermediate inputs of both goods and services. 

Campaign Art: Be Ivory Free

Roxanne Bauer's picture

People, Spaces, Deliberation bloggers present exceptional campaign art from all over the world. These examples are meant to inspire.

Most of us working at The World Bank Group remember Prince William’s visit last year to discuss corruption and the illegal wildlife trade.  In a speech, he announced the establishment of a royal task force to work with the transportation industry to examine its part in illegal wildlife trade.

Despite a ban on the international trade in ivory, African elephants are still poached in large numbers. Their ivory tusks are often carved into ornaments and jewelry. According to the Wildlife Conservation Society, around 35,000 elephants are killed each year due to poaching, devastating the elephant populations of West and Central Africa.  As recently as the 1930s and 1940s, there were between 3 to 5 million elephants in Africa, but today, there are only about 470,000.

WildAid launched a campaign in 2014 targeting the demand side of the ivory trade, with wildlife ambassadors admonishing that “When the buying stops, the killing can, too.”

Lang Lang, a world-famous Chinese concert pianist who has performed with leading orchestras in Europe, the United States and his native China, joined the campaign in May 2015 to help stop the killing of elephants for the ivory trade.  Lang Lang and WildAid produced the following video featuring a performance of Beethoven’s Sonata “Appasionata” and the work of award-winning photographer Nick Brandt. Brandt is the founder of Big Life Foundation and a frequent contributor to WildAid campaigns.
VIDEO: Be Ivory Free

Rise of informality in the tradable sector-- evidence from India

Ejaz Ghani's picture
The slow growth of Indian manufacturing is a concern for many observers of the Indian economy, and India’s manufacturers have long performed below their potential. Although the country’s manufacturing exports are growing, its manufacturing sector generates just 16% of India’s Gross Domestic Product (GDP), much less than the 55% from services. Since its liberalization, India has undertaken many trade reforms to increase its global integration, and the country has invested in domestic infrastructure projects to improve its regional connectivity.

From Tirole to the WBG Twin Goals: Scaling up competition policies to reduce poverty and boost shared prosperity

Anabel Gonzalez's picture
The role of policies that ensure and promote competition in the marketplace have moved to the forefront of economics and the development agenda. The Australian G20 presidency highlighted competition as one of the four policy areas for the growth agenda. India’s prime-minister Modi has placed competition on his transformational reform agenda, and The Economist recently emphasized the lack of competition as a source of low productivity among Latin American firms. Jean Tirole, who won the latest Nobel Prize for his analysis of market power and regulation, demonstrated how competition policies can spur powerful firms to become more productive and can give smaller firms more opportunity to thrive.

To respond to client demand at this crucial moment for economic development, the World Bank Group is generating knowledge to better understand the links among competition, growth and shared prosperity, and to develop policies that promote competition. Last week, at a Bank Group event, held jointly with the Organization for Economic Cooperation and Development (OECD), experts and practitioners discussed the growing body of empirical evidence on these matters. Representatives from the WBG’s client countries, in turn, shared how WBG competition policy tools are leveraging their development impact.

Competition in the marketplace matters for economic growth and household welfare for two reasons:
  • First, it fosters more productive firms and industries, allowing domestic firms to become more competitive abroad and to export more. A WBG study shows that substantially increasing competition in Tunisia would boost labor productivity growth by 5 percent.
  • Second, it protects poorer households from paying too much for consumer goods, and from missing out on the benefits of trade liberalization. In Mexico, lack of competition costs the poorest households 20 percent more than richest households. In Kenya, poverty could fall by 2 percent if competition was more intense in the maize and sugar markets.

Competition is restricted by businesses practices that undermine competitive dynamics. When firms agree to fix prices, empirical evidence reveals that consumers pay on average 49 percent more, and 80 percent more when cartels are strongest. Developing economies are still frequently marked by regulations that restrict the number of firms or limit private investment; rules that increase business risks and facilitate agreements among competitors; and rules that discriminate against certain competitors or affect competitive neutrality. When new retail firms are allowed to enter the market, real household income increases by 6.2 percent.

Who sets the rules of the game in Asia?

Sri Mulyani Indrawati's picture
© Nonie Reyes/World Bank

It is now a commonplace to refer to the 21st century as the Asian Century. With the world economy struggling to recover from the global financial crisis, the Asia Pacific region, and especially its developing countries, has provided much of the impetus for global growth. In 2015, developing countries in the East Asia Pacific region are likely to account for over one-third of global growth — twice as much as the rest of the developing world. China in particular is now an economic powerhouse. By some measures China is now the world’s largest economy as well as the biggest global manufacturer and exporter.

With this economic success has come increased scrutiny of the region. The rest of the world now wants to know: who sets the rules of the game in Asia?

Have technology and globalization kicked away the ladder of ‘easy’ development? Dani Rodrik thinks so

Duncan Green's picture

Dani RodrikEconomic transformation is necessary for growth that can lead to poverty reduction. However, economic transformation in low-income countries is changing as recent evidence suggests countries are running out of industrialization options much sooner than once expected. Is this a cause for concern? What does the past, present, and likely future of structural transformation look like? Read on to find out why leading economist Dani Rodrik is pessimistic and what some possible rays of light are. 

Dani Rodrik was in town his week, and I attended a brilliant presentation at ODI. Very exciting. He’s been one of my heroes ever since I joined the aid and development crowd in the late 90s, when he was one of the few high profile economists to be arguing against the liberalizing market-good/state-bad tide on trade, investment and just about everything else. Dani doggedly and brilliantly made the case for the role of the state in intelligent industrial policy. But now he’s feeling pessimistic about the future (one discussant described it as ‘like your local priest losing his faith’).

The gloom arises from his analysis of the causes and consequences of premature industrialization. I blogged about his paper on this a few months ago, but here are some additional thoughts that emerged in the discussion. He’s also happy for you to nick his powerpoint.

Dani identified two fundamental engines of growth. The first is a ‘neoclassical engine’, consisting of a slow accumulation of human capital (eg skills), institutions and other ‘fundamental capabilities’. The second, which he ascribed to Arthur Lewis, is driven by structural differences within national economies – islands of modern, high productivity industry in a sea of traditional low productivity. Countries go through a ‘structural transformation’ when an increasing amount of the economy moves from the traditional to the modern sector, with a resulting leap in productivity leading to the kinds of stellar growth that has characterized take-off countries over the last 60 years.

Simulated Manufacturing Employment SharesManufacturing has been key to that second driver. It is technologically dynamic, with technologies spreading rapidly across the world, allowing poor countries to hitch a ride on stuff invented elsewhere. It has absorbed lots of unskilled labour (unlike mining, for example). And since manufactures are tradable, countries can specialize and produce loads of a particular kind of goods, without flooding the domestic market and driving down prices.

But that very dynamism has produced diminishing returns in terms of growth and (especially) jobs. Countries are hitting a peak of manufacturing jobs earlier and earlier in their development process (see graph). And it could get much worse – just imagine the impact if/when garments, the classic job-creating first rung on the industrialization ladder, shift to automated production in the same way as vehicle production.

'Business unusual' can still work

Cecile Fruman's picture

I recently spent three days in Hargeisa, Somaliland. An eye-opening experience, as much as one that strengthens my conviction that World Bank Group is doing the right thing by engaging in this fragile country.

Somaliland is business unusual. Imagine among others, sitting in a mandatory security brief and specifying your blood type straight off the plane, going to meetings in armored cars, wearing the hijab  – a veil worn by Muslim women in the presence of adult males – scheduling meetings around prayers and the time of Iftar, the evening meal when Muslims end their daily fast during Ramadan.

The business environment in Somaliland is characterized by a fragile state, poor public service delivery, a weak legal and regulatory regime, inefficient and costly trade logistics, and a fragmented private sector with limited structured engagement with the government. Although the private sector accounts for more than 90 percent of GDP (an anomaly in Africa), it has poor access to finance and lacks an organized voice.

Meeting with the President of the Republic of Somaliland.
During my mission, I met with key Ministers, entrepreneurs and development partners and discussed the challenges and opportunities linked to the ongoing economic development agenda, notably the development of infrastructure and the energy sector. The exchanges highlighted how the World Bank Group's program in Somaliland is laying a foundation to create job opportunities and to accelerate the pace of economic development by fostering business reforms and SME engagement. In this light, the set-up of a high-level taskforce – reporting directly to the President – to implement Doing Business reforms compiled in a Doing Business memo, is a milestone and a strong sign of client buy-in. That is always crucial for the World Bank Group's programs to reach their objectives.  

Last, I participated in the presentation of the pilot Reform Champion Program, which aims to develop the capacity of government officials and some representatives of the private sector to implement key reforms that will address constraints to economic growth and development. The project is expected to help trained reform champions implement at least five reforms to improve government-to-business services by July 2016.

Ensuring the poor benefit from global trade

Anabel Gonzalez's picture

A woman brings onions to market in Mali. Photo - Irina Mosel / ODI via Flickr Creative CommonsThis week the World Bank Group, the largest multilateral provider of aid for trade, is participating in the World Trade Organization’s 5th Aid for Trade Global Review. Every two years, the Global Review brings together participants in global trade from all over the world, including trade ministers, the heads of international development institutions, the private sector and civil society. We will be focused on the role of trade in helping achieve the Bank Group’s Twin Goals: ending poverty and boosting shared prosperity.

The role of trade in ending poverty is the subject of a new WTO-World Bank Group publication being launched on 30 June, the first day of the Review.  The report argues that to achieve the end of poverty by 2030, more needs to be done to connect the nearly one billion people who remain in extreme poverty to trade opportunities. On 30 June the report will be available online, along with further details about the agenda it sets out for maximizing the gains of trade for the poorest.

A critical part of this effort, and the theme of this year’s Aid for Trade meeting, is the importance of reducing the costs of trade. The Bank Group is publishing new analysis at the review, using a database we have developed with UNESCAP, which illustrates how the costs of getting goods to overseas markets are significantly higher for developing countries. For example, low income countries face costs that are on average three times higher than for advanced economies. Landlocked countries and small islands also face particularly high trade costs. The reasons vary, but include poor road networks, weak logistics, inadequate port facilities, antiquated customs procedures, corruption at border crossings, and outdated legal and regulatory structures. Lowering these trade costs makes firms in developing countries more competitive, allowing them to benefit more from trade opportunities. Implementing the Trade Facilitation Agreement will help, and will be an important focus for us at the Review, but the greatest impact will be achieved by comprehensive strategies to tackle these wide-ranging sources of trade costs.