Regional Integration Spells Economic Evolution

May 11 , 2019 . By Haben Mehari

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Parliament recently ratified the African Continental Free Trade Area, which would do away with quotas and tariffs when trading within the continent. Requiring ratification by 22 countries, this made Ethiopia the 21st to get on board with this grand ambition. This agreement is expected to create a market of one billion people by increasing competition, improving productivity and expanding trade destinations.

The preliminary finding of the African Regional Integration Index, which monitors the status of economic integration, indicates that regional integration remains low. Kenya scores the highest, while Ethiopia ranks the lowest, even behind Eritrea. Even though Ethiopia has been an outspoken proponent of African unity, there is a path yet to be walked in terms of economic integration.

Regional Integration in Southeast Asia started with a bottom-up approach, with businesses driving the agenda and the government following suit through policy initiatives. The Association of Southeast Asian Nations (ASEAN) consists of Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam. Formerly national production processes are now unbundled and dispersed to lowest cost locations throughout the region.

Such initiatives have allowed ASEAN members to achieve a high level of regional specialisation in sectors such as electronics. The region has now developed a global competitive edge in this regard. Efforts towards the integration of services markets and investment have facilitated the smooth movement of highly-skilled service suppliers, intra-corporate transfer and professional and technical staff.

The launch of the ASEAN Exchanges, which combined economies valued at two trillion dollars in gross domestic product (GDP), opened a market for close to 600 million consumers and an opportunity to invest in the top 200 performing stocks from Southeast Asia.

This has also been implemented in West Africa with Bourse Regionale des Valeurs Mobilieres (BRVM), a regional stock exchange founded in 1998. Now its member countries are also moving toward a common currency, the Eco. The East African Community (EAC), which is a regional intergovernmental organisation of Burundi, Kenya, Rwanda, South Sudan, Tanzania and Uganda is also pursuing a regional stock exchange called the East African Securities Exchange and a monetary union.

Regional integration can also figure into Ethiopia’s decision to privatise. The best way to do this is to go public, through the offering of shares in a stock exchange. This can prove to be a great opportunity for the nation in moving up the regional integration index.

A partnership and integration with a regional securities exchange can help bypass capacity limitation, capital market experience and simplify processes that pose significant implementation risks. This would also involve adopting the same rules, regulations and operating procedures. It would be beneficial both in terms of making the stock exchange establishment process simpler and also assure we have the exchanges well-developed policies, procedures and credibility. The exchange would benefit by creating a bigger, more diversified and appealing investor offering. It is a win-win for all players.

The government's push to modernise the economy has had one great constraint - the lack of modern financial infrastructure. To overcome this challenge and create new opportunities, regional integration is key. If pursued correctly, the stock exchange formed in Ethiopia can have a high market capitalisation.

Ethiopia already leads the continent in foreign direct investment. Imagine an Ethiopia with a robust stock exchange, a collaboration with a regional exchange or a well-capitalised one like the Nairobi Securities Exchange, which in turn is collaborating with the London Stock Exchange. This will give our young stock exchange well-developed policies, procedures and credibility. It would also pave a path toward regional integration, which is a much more sustainable means of becoming a lower middle-income country.

Regional economic integration has the effect of modernising economies by offering a larger consumer base and massive resources to pool from, writes Haben Mehari (haben.mehari@aiesec.net), an entrepreneur and a graduate student at Addis Abeba University.

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PUBLISHED ON May 11,2019 [ VOL 20 , NO 993]

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