Leveraging on cross-border infrastructure investments for growth

Creating wealth. Trucks at Ramatlabama border. More intra-Africa trade is expected to grow economies PIC MORERI SEJAKGOMO
Creating wealth. Trucks at Ramatlabama border. More intra-Africa trade is expected to grow economies PIC MORERI SEJAKGOMO

Infrastructure finance is one of the most resource-intensive, cross-cutting areas of investment demand in the developing world. The African Continental Free Trade Agreement (AfCFTA) and low levels of intra-African trade have thrust the conversation on regional integration, increased intra-regional trade and deepened cooperation into the spotlight.  The importance of trade as an engine for economic growth can never be overplayed.

A landlocked country like Botswana strives to use its geographic location as a transport and logistics hub to leverage growing regional trade and expand its portfolio as a land-linked pathway to the southern African market. This will require massive investments in road, air, and rail transport infrastructure to improve regional connectivity. It will also require innovative policymaking to prepare the domestic market for the coming opportunities.  What is clear is that Africa does not trade enough, especially with itself and this is attributed to the lack of sufficient infrastructure.

The African Development Bank (AfDB) has previously estimated that the infrastructure deficit in Africa amounts to between $130 and $170 billion a year; with an estimated financing gap of $68 to $108 billion.

These deficits are and have been costly to the economy of the continent and lead to stunted economic growth. Therefore, the provision of quality infrastructure would contribute to poverty reduction and stimulate primary and secondary economic activities. Reducing trade costs and improving access to corridors is not just a matter of building infrastructure.

The challenges of trade infrastructure remain a major impediment for ease of doing business and enhancing market access. The poor quality infrastructure has hiked up transportation costs, i.e., costs of moving goods, moving services, ideas, and labour.

This research had a substantive contribution to make. The first is towards the policy debate on infrastructure investments, rationalising why nations trade and the role infrastructure plays to this effect. The second is on the empirical front, using the gravity model for the southern African region to compare ex-ante and ex-post trade data for Botswana and Zambia, and estimating the potential for trade growth in the absence of a bridge and the presence of it.

The first premise of the research worked to prove that in addition to free trade agreements, cross-border infrastructure investments as trade facilitation tools could serve to further build a positive relationship between trade and regional integration, and subsequently economic growth. The potential impact is even greater for landlocked countries.

There is a significant effect on trade flows with a larger impact on exporters than importers that were found.

The mere improvement in infrastructure has a great amount of impact, followed by port efficiency; therefore, reforms in growing regional trade cannot be done in piecemeal approaches. Performance reviews of regional blocs in Africa using the gravity model have been carried out before. Although the results slightly vary, the general conclusion seems to be similar: that regional integration in Africa has huge potential but has failed in achieving its objectives of increasing intra-regional trade and fostering policy coordination in general. More relevant to this research were studies on cross-border infrastructure investments and impact evaluations of trade facilitation tools.

Various empirical studies demonstrate the impact that infrastructure has on international trade and how upgrading cross-border infrastructure could lead to positive outcomes: Helble et al. (2009), Zaki (2014), WTO (2015). Currently, cross-border infrastructure in Africa is far below potential, which is why Botswana and Zambia must make radical efforts to ensure the success of Kazungula as a model worth emulating for the rest of the continent.

In its simplest form, the gravity model postulates that (all things equal), the larger (or the more equal in size) and the closer the two countries are, the larger the volume of trade between them is expected to be. For example, we expect the United States to trade more with its neighbours Canada and Mexico than with similar but more distant nations, and more with larger economies such as China, Japan, and Germany than with smaller ones.There are, however, other factors that increase trade besides distance:  same language, similar culture, lack of trade restrictions etc. This research used the Greater Mekong Subregion – a trans-national region in Southeast Asia comprising Cambodia, China (specifically Yunnan Province and Guangxi Zhuang Autonomous Region), Lao PDR, Myanmar, Thailand, and Vietnam as a case study. The outcome of cross-border infrastructure investments for trade in that region was a reduction in service linked costs. The development of economic corridors positively impacted intra-regional trade in intermediate goods, especially electric machinery. This implies that cross-border transport infrastructure in the region contributed to lower trade costs and facilitated vertical integration across borders in this industry.

According to the 2019 Fitch report, Botswana is one of the two countries that will emerge as major transportation gateways on the regional North-South corridor. An efficient road network and improved connectivity will boost overall trade growth in Southern Africa in the medium-to-long term. Landlocked countries with well-established road networks will provide key land links that will underpin intra-regional trade, particularly once the AfCFTA enters operation. Because landlocked states lack direct access to the sea, their relatively central geographic location makes them some of the best-connected countries regionally for overland supply chains, linking the Southern African states with each other and to other states in Central and East Africa.

As a result, road and rail networks connecting key border crossings will also enhance trade competitiveness in the region. The Kazungula bridge will no doubt expand transport infrastructure to boost regional freight logistics and strengthen regional trade. There’s a consensus amongst economic literature that transport infrastructure has agglomeration creating effects that raise income through positive spillover and multiplier effects. Economic growth and investment in infrastructure go hand in hand.

Perhaps the greatest opportunities for trade in the region lie in the exploitation of comparative advantages to create supply chains. Even if significant projects like the Kazungula bridge exist, it is also critical to improve country-wide road and rail networks that lead up to the borders. Given the growing demands of infrastructure in developing countries, interrogating alternative forms of financing, especially for African countries would be a worthy research agenda. The implications for policy formulation and implementation are far-reaching. The SADC region must make concerted efforts to invest in cross-border regional infrastructure to the extent that it is fully functional and effective. This will boost domestic industries and cater to informal and small traders. Harmonisation of policies and legal frameworks would also go a long way in boosting the region’s competitiveness. As a final note, the success of cross-border infrastructure investments is unfortunately not just dependent on the rationality of economic theories and equations. Political and technocratic leadership has proven to sometimes be the Achilles’ heel of simple economic logic.

*This article was adapted from Ntshingane’s Graduate School dissertation, submitted for the degree of Master of Economics (International Trade) at Jeonbuk National University, South Korea

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