Iedp 2010 Action Learning Project Regional Integration of Financial Systems

Lessons learnt from the COMESA journey

A number of lessons can be drawn from the COMESA experience, including the challenges of multiple memberships by countries, the inequitable distribution of benefits and labour force migration.

COMESA is a regional integration grouping of 21 African member states which includes (Angola, Burundi, Comores, Democratic Republic of the Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Tanzania, Uganda, Zambia, and Zimbabwe), established in 1994, replacing the Preferential Trade Area (PTA) that existed since 1981, in a move to eliminate all internal trade tariffs and barriers.

The COMESA Treaty stipulates the aims and objectives of COMESA as:

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  Attaining sustainable growth and development of the member states by promoting a more balanced and harmonious development of its production and marketing structures
  
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  Promoting joint development in all fields of economic activity
  
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  Co-operation in the creation of an enabling environment for foreign, cross-border and domestic investment
  
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  Co-operation in the promotion of peace, security and stability among member states
  
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  Co-operation in strengthening the relationship between the Common Market and the rest of the world
  
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  Contributing towards the establishment, progress and the realisation of the objectives of the African Economic Community
  

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5.1 Multiple memberships

SADC, COMESA and EAC consist of members states that belong to other regional organizations, as can be seen in the graph below.

Figure 11: SADC, COMESA, EAC members

Source: Lungelo & Mbilinyi (2009)

From a legal as well as technical point of view, a country cannot apply two different common external tariffs and therefore cannot be a member of more than one customs union. Hence, the current pattern of overlapping membership becomes impossible to maintain since COMESA has already become a customs union and SADC will follow soon.

The lesson for SADC is that regional integration is hampered by member states that have dual membership have to choose the region they belong to with an effort to ensure that the milestones are achieved.

5.2 Fears over the distribution of integration gains

The REC may not succeed because of the fear among partner states of the discretional effects following an integration process. A critical issue in the success of integration schemes is the equitable distribution of the benefits of integration between member states. Fouroutan (1993) argues that a common reason for the failure of regional integration in Africa is the concern among the poorest African countries that the removal of trade barriers may cause the few industries which they possess to migrate to industrially more advance countries.

Intra-trade between the members of the proposed REC is still very low. For instance EAC exports to the SADC region in 2007 accounted to only 8.3% of the total exports and 20.9% to COMESA. Intra-SADC trade accounted to only 20% of total SADC trade in 2007. (Lunogelo & Mbilinyi, 2009). This cast doubt whether the move to unite the continent will bring any substantial trade creation. The weak trade link between the Eastern and the Southern blocs may threaten the move to form one REC as proposed. The weak link can be explained by the structure of the economies that most of them produce and export similar raw primary products, lack of value addition, low level of industrialisation (except for South Africa) and poor infrastructure systems.

A lesson for SADC is that an effective legal framework needs to be in place to ensure that the poorer member states are protected from the influx of big economies in their states, which can hamper the progression of local firms.

6. South African banking sector’s readiness for the change

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   Readiness for financial integration
   

It is important to state that the road to integration of any sort will have to overcome at least five important hurdles, which almost all the major banks in South Africa accept:

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   The fear or possible loss of sovereignty, especially by smaller financial institutions
   
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   Potential loss of revenues, including fees and other traditional income streams.
   
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   Lack of financial resources to create and sustain integrated structures and other operational mechanisms
   
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   Potential difficulties in managing the wide variation in the socio-economic development of various communities and market segments
   
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   Fear of the unknown regarding economic benefits
   

Major South African financial institutions acknowledge that integration should indeed be a deliberate process, focusing on clear principles and operational guidelines.

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   Readiness for change
   

South African banks will face resource constraints, and an increase in resources envelops will be required to allow for effective support of the regional integration agenda to succeed.
Deeper regional trade integration will require the strengthening of financial integration. This in turn will require a comprehensive program aimed at strengthening and streamlining financial sector policies and financial infrastructure (regulatory framework, payments systems). This will also help in the development of strong financial institutions (banks, non-bank financial institutions bond and capital markets) and enhance the financial system’s ability to mobilize and allocate resources, especially medium and long-term resources for development financing. This is critical for supporting private sector development, regional and international trade and, ultimately, growth and poverty reduction.

Figure 12: SADC Modernisation 2010
Source: SADC (2010)

According to SADC (2010), each SADC member is in the process to prepare for an efficient and effective payment system which will be internationally acceptable, interlinked within the region and will support free trade. Figure 12 above indicates the readiness of SADC members for such a payment system.

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