6:17 AM Feb 25, 1994

EC SINGLE MARKET WILL ADVERSELY AFFECT AFRICA

Geneva 25 Feb (Chakravarthi Raghavan) -- The completion of the European Community's Single European Market (SEM) will adversely affect African countries, without much opportunity for positive benefits, according to a just published UNCTAD Discussion paper.

The paper, by Jean K. Thisen of the UN Economic Commission for Africa (ECA), says that though the SEM would not be only factor influencing African exports to the EC market, it would nevertheless increase competition and intensify Africa's declining share of exports to this market.

Except in a limited number of cases, African products will face comparatively more hostile competition, leading to a drop in export volumes and values.

Africa, the ECA economist concludes, needs to improve competitiveness of its products, since it was most unlikely that the New Europe would continue to adopt or maintain any special regime of preferences for African country-exports.

African countries should hence intensify their own structural transformation to increase competitiveness of their exports, diversify their external trade structure to encompass triangular trade involving them, the EC and the countries of eastern Europe.

The African countries should also endeavour to expand trade among themselves in raw materials and processed or semi-processed products, and specially trade in food commodities and cereals for which there is considerable scope, and which now currently absorbs a great proportion of Africa's foreign exchange earnings through imports from the OECD countries, particularly the European Community.

The current export trade of Africa however shows considerable dependence on exports to the OECD countries, particularly to the EC. Exports of Africa to the OECD countries in 1990 accounted for $49.763 billion or 80 percent of Africa's total world exports. Of this, the EC accounted for 59 percent.

Africa's trade with the former centrally planned economies accounts for six percent of the region's exports, and with other developing countries for 7.7 percent.

Over the period 1975-1990, intra-African trade averaged 4-6 percent only.

Among the major reasons for this relatively low-level intra-African trade is the structure of production and distribution in African countries, with a very restricted range of products available for trade and, even where production can be readily absorbed, with producers unable to take advantage of economies of scale because of limited national markets. An aspect of this limited national market is the peripheral nature of rural markets -- owing to inadequacies of internal means of transport and communications, the low levels of rural incomes and limited purchasing power.

Africa's share of the EC market increased from 5.0 percent in 1970 to 6.6 percent in 1980, then subsequently declined to 4.8 percent in 1985, 3.4 percent in 1987 and 2.8 percent in 1990.

Africa thus began losing the EC market share during the second half of the 1980s -- and this despite the preferences granted to the African countries under the Lome III Convention -- due to low competitiveness and supply bottlenecks in Africa.

Since 1987 -- the advent of the SEM decisions -- intra-EC trade expanded, due in part to the entry of Portugal and Spain into the EC. All other groups of countries experienced reduced market shares. The share of other OECD countries dropped from 27.5 percent in 1985 to 22.4 percent in 1990, that of former centrally planned economies from five percent to 4.7 percent, and that of other developing countries from 11.1 percent to 9.3 percent.

But developing Africa's loss was greater than that of others, dropping from 4.8 percent to 2.8 percent. But some countries in sub-Saharan Africa, Mauritius and Zimbabwe in particular, were able to increase their exports of manufactures to the EC. Whether Africa's export trade with the EC will decline further or not depends on the types of products Africa can export.

As for imports, Africa's share of manufactured imports from EC has fallen back by 50 percent since 1970, while that of food has increased.

"There is concern," Thisen adds, "that the increased dependence on imports of foods and agricultural raw materials may have squeezed out imports of manufactured equipment and capital goods which are needed to build up the infrastructure and productive base for Africa's development."

In terms of sectors, in agriculture the dismantling of quantitative restrictions, save for bananas and rum, would not significantly affect trade prospects of the African countries.

In services, the ECA economist foresees an increase in tourism exports to the EC by African countries (due to a combination of price and income effects). Increased competition and its downward pressure on prices would be more than offset by the proposed value-added tax on intra-European travel and expected labour cost increases in tourist areas of EC which compete with African tourism.

In transportation, competition in aviation and deregulation under the SEM, would make a few major European airline companies more competitive. While African airlines would no longer enjoy fifth freedom traffic, their European counterparts might continue to enjoy this right which had been generously granted to them throughout Africa. And since the whole of Europe would be treated as a single territory, this would lead to African airlines being confined to a very few points in Europe while European airlines would probably continue to operate throughout Africa.

In the area of direct investment flows, the completion of the SEM would result in continuing directing of more capital towards financial speculation and more profitable 'openings' in Europe to the detriment of investment in developing countries. Disinvestment in Africa is a trend that is gaining momentum and unification in Europe would give rise to severe competition among firms selling to Europe and more selective investments both inside and outside the EC. Thus Africa might experience more difficulties in attracting industrial investments as other regions including eastern European countries have a decisive comparative advantage.

Foreign Direct Investment flows to Africa have declined steadily over the second half of the 1980s. Africa's share in world FDI rose from 2.4 percent in 1970 to 6.3 percent in 1985, and then decelerated to 1.4 percent in 1990. There is clear evidence of diversion of investments from Africa in favour of other regions.

Another area of concern to some African countries is their monetary relations with European countries. The fixed exchange rates within the franc zone had played an important role in directing investments to the African member countries, the European Monetary Union would mean would leave little room for special relations between the French Franc and the CFA franc and without effective alternative arrangements, there would be monetary instability.

Since the paper was written, the CFA franc has been devalued by 50 percent visavis the French franc.