A borderless Africa is the foundation of a competitive continental market that could serve as a global business center. It would allow agricultural and industrial production across national boundaries and therefore offer economies of scale to investors, while creating much bigger markets and providing new opportunities for small firms and large. It would help eliminate monopoly positions while enhancing cross-border spillovers between coastal and landlocked countries. At a deeper level, regional integration can improve regional security, since the expansion of international trade often correlates with a reduced incidence of conflict.
Reducing tariffs and non-tariff barriers
The first expected outcome of an effective preferential trade agreement is an increase in trade among members— through three channels. The first is reducing tariffs between members. The second is reducing non-tariff barriers that arise from policies and from non-policy-induced rent extraction. The third, and hardest to achieve, is through the two components of trade facilitation: a “hard” component, related to tangible infrastructure such as ports, roads, highways, and telecommunications, and a “soft” component, related to transparency, customs management, the business environment, and other intangible institutional aspects that affect the ease of trading. The first two are the outcomes of measures taken under shallow integration, and the third is associated
with deep integration.
Increasing labour mobility
Migration is happening in Africa even if not all free movement of persons protocols are ratified and implemented. Fully implementing all of them might increase flows among African countries.
That makes it important to focus on what prevents countries from implementing the protocols. The Africa Union Passport, launched in July 2016 at the African Union Summit in Kigali, encourages the free movement of people in general and labor mobility in particular. And the first objective of the African Continental Free Trade Area is to “create a single continental market for goods and services, with free movement of business persons and investments, and thus pave the way for accelerating the establishment of the Continental Customs Union and the African customs union.” For these initiatives to be successful and effective, it is useful to proceed by first improving the effectiveness of the policies within each regional economic community (REC) before scaling up efforts to the continent. And because integration should happen not only in the goods market but also in factors of production, the discussions should attend more to the free movement of
Integrating financial markets
Despite progress, financial markets in Africa are still weakly integrated. Measures of institutional restrictions to financial flows suggest that a lot more needs to be done from a governance perspective. The correlations between domestic savings and investment rates are still strong, even though they should have been weakening in the absence of barriers to capital movements. Interest rate spreads on retail banking are still wide but have stabilized in the past few years. And African stock markets are more sensitive to global benchmarks than to the South African benchmark. Bold reforms, especially at the institutional level, are needed to synchronize financial governance frameworks across the region and to remove any remaining legal restrictions to cross-border financial flows and transactions. It is important to pursue stronger technological advances in the harmonization of payment systems across the continent, as this would facilitate actual movement of funds across borders. As an extension of regional integration, monetary unions in Africa are seen as a way to achieve prosperity and better governance, sparked to some extent by the example of European monetary integration.
But African monetary unions have under-performed, failing to bring about economic prosperity and poverty reduction. In many cases, even the weaker requirements of free trade areas
and customs unions have not been met. Yet African political leaders have consistently chosen to forge ahead without first taking the bold institutional and economic coordination measures that
would enable monetary unions to strengthen integration in Africa. In the absence of true fiscal and economic coordination, the opportunity cost of maintaining a single currency can be high.
While the treaty creating the African Union envisions a single currency for Africa, and many RECs have plans to create regional currencies, these plans are in most cases more aspirational than
concrete guides to national policy. Countries need to implement the institutional building needed to make a monetary union successful, such as close coordination of banking supervision, a willingness to come to the assistance of countries in economic crisis, and political federation to coordinate fiscal policies and control deficits.