63806 Deepening Regional Integration to Address Africa Trade Policy Notes Burundi’s Trade Challenges and Support Note #18 Economic Growth Nora Dihel1 May 2011 Key messages: Introduction • Export diversification is critical: Burundi’s This note explores the role of regional export base is narrow and undiversified, integration in addressing Burundi’s trade and making the country vulnerable to external development challenges. It presents Burundi’s shocks and dependent on foreign financing main export and import challenges and discusses • Services can play a key role: There is a the role of regional integration in reducing the country’s current high transport costs, strong need to raise awareness about the diversifying its trade flows and attracting foreign crucial role of services and trade in services direct investment. The note provides concrete for Burundi’s export diversification and policy recommendations to deepen Burundi’s development. Services such as integration with neighboring countries, improve telecommunications, energy, transport, and its trade performance and increase its business services are important inputs into competitiveness. In addition, the note gives the production of goods and other services some practical guidance regarding the and hence influence productivity and implementation and sequencing of these competitiveness. Increasing the availability, recommendations based on Lesotho’s successful affordability and quality of services is experience in addressing typical trade challenges crucial for export diversification, economic facing landlocked LDCs. growth and poverty reduction in Burundi. • Regional integration needs to be more 1 This note is based on the findings of chapters 2 and 3 of effectively pursued: There are two main World Bank (2010), “Republic of Burundi: Country issues that need to be addressed (i) Burundi Economic Memorandum: The Challenge of Achievement Stable and Shared Growth�, and Mabushi, E.(2010), needs to coordinate EAC and COMESA “Burundi and the EAC - Advancing Regional Integration". integration and address the large deficit of The note was prepared as a supporting document for the technical and institutional capacity; (ii) High level Cabinet Seminar that took place in Burundi on deeper integration to remove non-tariff March 21-22, 2011. barriers (NTBs) and integrate services. The lesson from successful regional integration of the other EAC members, Burundi has a experiences elsewhere in the world is that relatively high level of export concentration. tackling tariff barriers is not enough to Burundi’s economy is highly dependent on enhance trade. Burundi must also aim to primary products, predominantly coffee facilitate regional trade by addressing NTBs, followed by tea, Burundi’s export structure is such as restrictive product standards or characterized by very low use of technology. complex rules of origin. In the services area, Burundi has been only partially successful in Burundi needs to put special emphasis on introducing high-value primary products, such the behind-the-border reform and regulatory as cut flowers and the income potential of agenda. There is a strong need to coordinate Burundi’s export basket remains low. regulatory reform with liberalization of explicit trade barriers. The expansion of coffee faces severe challenges. • Attracting FDI is crucial for export Some 600,000– 800,000 households (perhaps diversification. Opening up to foreign direct one-third of the population) grow coffee. investment can be an effective mechanism to Though Burundi has the agricultural conditions increase competition and efficiency in the to produce high-quality, high-value coffee, the provision of goods and services in the sector underperforms with declining production domestic economy. and quality partly because inadequate official • Key structural constraints must be measures do not stimulate production. Unlike addressed to move ahead with the trade Rwanda, Burundi has been slow to match the agenda. A key message from experience in latest developments, such as the increased other LDCs such as Lesotho is that when importance of specialty coffees or the marketing moving forward in designing and of high-quality coffee. implementing effective policies for export- Imports play a major role in the Burundian led growth and development, it is important economy. The country imports a wide variety of for Burundi to focus on improving its goods, with manufactures representing about business regulation and investment climate. two-thirds and fuel about 15% of Burundi’s Furthermore, reaching out to private sector goods imports. The import composition largely partners, both domestic and foreign, and reflects the lack of a domestic manufacturing ensuring that high quality infrastructure and industry and fuel resources as well as the limits a better functioning financial system are in of a small domestic market that prevents place can help attract FDI and improve the economies of scale. country’s trade performance. Finally, it is important for Burundi to put in place the As a small, landlocked country Burundi necessary institutional arrangements to confronts significant difficulties and costs in coordinate, monitor and evaluate the accessing global markets. High trade costs, poor implementation of these trade and trade- infrastructure and underdeveloped services relatedbreforms. sectors limit Burundi’s ability to attract FDI, develop competitive higher-value activities for Burundi’s Trade Challenges: Narrow and export and pursue export-led growth. The Undiversified Export Base and High internal obstacles are compounded by high costs Dependence on Imports in the ports of Dar es Salaam (Tanzania) and Mombasa (Kenya), through which Burundi Burundi’s very narrow export base (averaging trades. The following factors can further explain only about 10 percent of GDP) has not changed Burundi’s poor trade performance: notably in the last 20 years. Compared with most First, Burundi has one of the most unfavorable There is consensus among policymakers and business environments worldwide. The World private sector stakeholders that the country’s Bank’s 2010 Doing Business survey ranked goods export expansion will have to be driven Burundi 176 out of 183 countries surveyed in by a combination of quality improvements of its their Ease of Doing Business Ranking, near the traditional products (such as coffee and tea) and bottom relative to other countries assessed in the exports diversification. Several products have areas of dealing with permits, getting credit, been identified as potential export products: protecting investors, trading across borders, and cotton; mining; fisheries; tourism; handicrafts; enforcing contracts. Another cross-country and nontraditional exports, such as fruits and assessment of business conditions ranked vegetables, flowers, ornamental plants, aromatic Burundi 133 out of 133 countries surveyed in its and medicinal plants, and palm oil. Global Competitiveness Index. Survey respondents highlighted corruption, political By contrast, policy makers tend to neglect the instability, inefficient government bureaucracy, role of services as a source of export and crime and theft among their top concerns. diversification, with trade policies focusing solely on goods. Second, the private sector in Burundi faces The provision of clean water, effective several major constraints. The Burundian private sewerage, a stable supply of energy, and access sector is underdeveloped - it includes a large to education and health services is critical to number of small enterprises, most of which increasing welfare and alleviating poverty. operate in the informal sector. Furthermore, Services such as telecommunications, energy, Burundi’s economy is dominated by public transport, and business services are important enterprises, several of which face financial inputs into the production of goods and other problems. services and hence influence productivity and competitiveness. Furthermore, distribution Third, the financial sector is small and not well services are important in addressing food developed; and access to finance is a major security issues. Increasing the availability, obstacle for companies in the formal and affordability and quality of these services is informal sectors. crucial for economic growth and poverty reduction in all developing countries. There is a Fourth, lack of infrastructure raises the costs of strong need to raise awareness about the crucial Burundi’s isolation. The country lacks roads, role of services and trade in services for bridges, ships, rails, power, communications, Burundi’s development. water and sanitation. The poor coverage and state of infrastructure create costs in time and But Burundi cannot move ahead with the trade money that lower the return to work, discourage agenda without addressing the structural domestic and foreign investment, and constrain constraints facing its economy. The process of economic growth. High transport costs, caused catching up will involve addressing (i) a non- by absence of infrastructure, hinder internal conducive business environment, including the trade and reduce Burundi’s trade opportunities lack of an encouraging statutory framework for a with East Africa and the world beyond. favorable investment climate and poor governance; (ii) the lack of dynamism and Finally, the limited availability of skilled competitiveness of the domestic private sector; workers and the low labor productivity of labor (iii) a weak financial system; (iv) the poor is another explanatory factor for Burundi’s poor physical and energy infrastructure; and (v) skills export performance. issues. Addressing these challenges will require both national reform and international reforms and strengthen political and regional cooperation, including increased regional stability. Box 1 describes in more detail the cooperation within the EAC. potential benefits resulting from Burundi’s EAC Membership. Burundi’s EAC Membership: Benefits and Risks While Burundi’s potential benefits from EAC Membership are compelling, the country has a Burundi belongs to several and often large deficit of technical and institutional overlapping organizations including the capacity and the challenges posed by a regional COMESA and the East African Community. A integration policy are enormous. Chief among recent and important development in East Africa those challenges and concerns are: has been the commitment of the five East African countries, including Burundi, to Capacity issues—Weak technical and establish progressively the EAC Common institutional capacity may delay or compromise Market Protocol that provides for the free the implementation of the agreed program. In movement of goods; the free movement of this regard, a capacity-building program is being persons; the free movement of labor; the right of developed with assistance from the U.K. establishment; the right of residence; the free Department for International Development movement of services; and the free movement of (DfID); but permanent technical assistance will capital. be needed, at least in the first years. In addition, although the working language in the EAC is Burundi authorities have shown strong English; most Burundians speak only French. commitment to EAC membership. Since This language misalignment has consequences Burundi was officially admitted as a member of in terms of common understanding and follow- the EAC on July 1, 2007, efforts have been up on agreed decisions. made by the authorities to align with the EAC requirements, especially in political, Loss of revenue resulting from adoption of the institutional, and economic areas. Burundi common external tariff—A study of the fiscal signed the treaty, ratified the protocols and the impact estimated a loss of 1.7 percent of total conventions, and developed (relatively late) a revenue. This is not a substantial loss, given communication campaign aimed at sensitizing existing alternatives of compensation, mainly the population to support the integration through tax reform (expanding the tax base, initiative. An institutional structure has been put eliminating exemptions) and the mechanisms of in place to further the integration agenda--a full compensation agreed between COMESA and the ministry was created in charge of EAC affairs, EAC for Burundi and Rwanda. as practiced within the other EAC member- states. It is critical for Burundi to develop a Indirect costs—Indirect costs of regional strategy that ensures successful participation in integration are related to the capacity of regional the EAC. hubs to attract and combine the best opportunities (research, education, employment, Burundi’s EAC Membership opens opportunities for the country’s goods and and so forth). Other indirect costs are related to the likelihood of criminal activity taking services trade. Furthermore, the regional physical and regulatory infrastructure that can advantage of free movement in a fragile area. The first problem is a political economy issue help link Burundi to a larger regional market and and needs to be addressed on the community the rest of the world. The EAC agreement can also create a push for economic and structural level. The latter poses a security problem and Box 1: Burundi’s EAC Membership - Potential Benefits Trade Gains from Burundi’s EAC Membership While Burundi is likely to reap larger traditional gains from trade from the Economic Partnership Agreement with the EU than through the EAC as Burundi’s export structure is very complementary with the EU import structure, and vice versa, trade with the EAC has enabled Burundi to move into differentiated goods, which it does not export to Europe. Regional trade agreements among natural trading partners are also more likely to facilitate deeper integration involving differentiation and diversification, which further expands welfare gains. The EAC offers a good opportunity for Burundi to export new products. Burundi, however, needs to implement a number of reforms in order to be able to successfully maintain and grow new exports. Benefits for the Industrial and Services Sectors from Regional Foreign Direct Investment Strategic regional partnerships aimed at attracting regional FDI can help Burundian firms increase profitability resulting from economies of scale generated by a bigger market and better supporting services. Also, Burundi’s low wages and the availability of (unskilled) labor constitute potential incentives to relocate regional production centers to the country. The regional partnerships could take the form of joint ventures with local small and medium enterprises, equity participation in the shareholder, or subsidiaries from which the economy would take the maximum benefit. Benefits from Regional Public Infrastructure As a landlocked country, Burundi depends on Dar es Salaam and Mombasa for most of its external trade. EAC membership does not guarantee progress, but it gives Burundi a forum to advocate for better infrastructure management in regional ports, rails, and roads that it does not operate directly. Public infrastructure plays a critical role in promoting economic growth. More efficient regional transport, telecommunication and energy infrastructure can help firms in Burundi to their lower transport and transaction costs and reduce their fixed and variable costs In addition, a regional integration process also provides gains through regional commitment mechanisms. Benefits from Political Stabilization and Improved Security Burundi could benefit considerably from a ‘regional’ political stabilization effect. Furthermore, regional integration mechanisms tend to strengthen an individual country’s bargaining power as well as the credibility of its policies. In addition, they tend to seriously lower security risks through regional agreements and other common arrangements. Moreover, there is a hope that the land issues that are a permanent source of conflict in Burundi could be addressed at least partially through the establishment of the EAC common market. Benefits from Accelerating Burundi’s Economic and Structural Reforms Regional integration can help Burundi accelerate its on-going reforms in the following areas: implementation and harmonization of fiscal instruments, financial sector reform on the basis of EAC standards and norms, reduction of tariff and non-tariff barriers affecting goods and services, reform of the business environment on the basis of EAC regulation. Regional agreements such as the EAC Common Market Protocol may also make it possible to reap scale economies in regulation and supervision, particularly where national regulatory agencies face skill constraints; they could also reduce scope for the capture of national regulation by private sector interests and reduce regulatory heterogeneity. Looking Ahead: Can Burundi Become a Regional Transport Hub and Exploit Additional Gains from Regional Integration? Because of its geostrategic location, the port of Bujumbura has the potential to return to its former role as traditional gateway to providing goods and transport services to countries bordering on Lake Tanganyika, especially to the eastern portion of the DRC. In the context of regional integration, development of intense mining and other economic activities in Burundi, eastern DRC, and Rwanda could efficiently use the services of the port of Bujumbura. In addition to its location, it is adequately equipped and currently operating at less than 50 percent of its capacity, according to statistics from the port authority. The future role of the port of Bujumbura, however, primarily depends on developments regarding the Tanzania Railways Corporation. also needs to be addressed at the community Multilateral vs. regional liberalization: While level; it further requires the setting up of a barriers to goods and services trade would monitoring mechanism and the establishment of ideally be liberalized on a non-preferential basis, regional security. such liberalization may not always be technically feasible or politically acceptable, Other risks related to persistent insecurity in especially when impediments arise from Burundi and the possible focus on the electoral differences in regulatory requirements. Deeper agenda— Although the recently established regional integration through regulatory technical committees for monitoring and cooperation with neighboring partners, which evaluation and donor support should mitigate have similar regulatory preferences, can usefully such risks, the Government needs to remain complement non-preferential trade focused on its regional commitment to keep the liberalization. Deeper regional integration would momentum. also enhance competition between providers of goods and services, allow these providers to Timing of the implementation of priority exploit economies of scale, and produce a wider measures—The timing is considered very variety of goods and services. Regional ambitious for the newest member-states— integration brings further benefits in that a larger especially for Burundi. Negotiations based on regional market is able to attract greater the variable geometry principle should help domestic and foreign investment, and address this issue. regionalization may help to take advantage of scale economies in regulation, particularly To sum up, in order to be able to maximize the where national agencies face technical skills or benefits from the regional integration process, capacity constraints. Burundi needs to implement reforms in the following areas: capacity building, institutional Regarding goods trade, key challenges refer to reforms, increased cooperation with and NTBs. NTBs in Burundi remain a serious involvement of the private sector in the reform concern for intraregional trade—especially process, and a clear coordination and customs and administrative procedures, communication mechanism. including the length of the clearance formalities and the high number of institutions involved in Recommendations for Policy Action control operations at the port in Bujumbura. Burundi needs to implement a comprehensive Proposed measures to remove Burundi’s NTBs approach to regional integration, prioritizing and within the EAC are: sequencing actions in order to be able to benefit from EAC membership and address the trade • Establishing a mechanism for identifying and monitoring the disposal of NTBs. Preferably, challenges. Most importantly it needs to address this mechanism would include both public economic reforms and institutional constraints. sector and private sector representatives concerned with issues of trade facilitation. Key recommendations are the following: • Consolidating institutions in charge of customs clearance and administrative control Economic Reforms: at the port of Bujumbura in a one-stop window to streamline the transit and customs 1. Trade policy reforms formalities. • Improving layout and equipment of border posts. • Introducing competition in the selection of sector and the improvement of its companies for preshipment inspection. competitiveness by enhancing the framework for • Gradually establishing an infrastructure for private-public dialogue. quality control and certification. 2. Business environment Regarding services trade, key challenges relate to the coordination of regulatory reform with Burundi needs to implement reforms of the legal the removal of explicit trade barriers. and regulatory frameworks to address the poor regulatory framework that is characterized by Liberalizing services trade is typically more cumbersome administrative and bureaucratic complex than liberalizing goods trade and can procedures, high tax rates, outdated legislation, require considerable technical capacity. The and weak capacity to enforce contracts. complexity arises from the necessity for many Furthermore, it needs to reinforce incentives for services sectors to be regulated in order to growth in private investment, and disengage the ensure that they operate efficiently in the face of government from the productive sector and market failures. The challenge is one of privatization of public enterprises. integrating domestic services markets with regional and global markets, while promoting a Burundi has made some progress in terms of regulatory environment that delivers competitive promoting an environment conducive to services sectors and allows public policy business: it has recently drafted several business objectives, such as universal access, to be met instruments that take into account harmonization efficiently. with regional tools. However, a number of issues remain on the agenda: for example, the duty Coordinating services trade liberalization with exemptions, the tax incentives to export regulatory reform to make them mutually procedures, customs regulations, and transit reinforcing can be vital in mobilizing and cargo regulations have not yet been harmonized sustaining support for reform. Domestic at the EAC level; and limited progress has been regulatory reform includes the easing of entry made in harmonizing standards. requirements and the elimination of disproportionate restrictions on competition and 3. Infrastructure on the operation of firms in various services sectors. Furthermore, deeper regional To provide the private sector with the necessary cooperation to decrease regulatory differences means to operate and increase productivity, it is between Burundi and it neighbors in areas such essential to close the main infrastructure gaps in as licensing requirements or standards needs to Burundi. Burundi’s proposed infrastructure be pursued. This emphasizes the importance of action plan aims at addressing weak developing the capacity to define and implement infrastructure in the following sectors: power, sound regulatory policies for services sectors, transport, and communications. capacity that is limited in Burundi. The DTIS • One of the objectives of the program for the update will provide detailed guidance on these power sector is to ensure, through increased largely unexplored issues in Burundi. investments in domestic and regional generation capacity, that the business Policies on trade and diversification need to be community and households have access to complemented by reforms to improve the reliable power supply 24 hours a day. business environment and by an effective and • The key objectives of the proposed action plan practical support to the promotion of the private for the transport sector are to lower the costs of transport for the entire economy and to new products and lending mechanisms for small improve access to local and international and medium enterprises and rural areas and markets. The proposed program focuses on building the capacity of the Banque Nationale de road transport and civil aviation, and Développement Économique (BNDE) to lend in investigates the possibility of a rail extension from Tanzania into Burundi. rural areas. • The proposed communications program aims Development of an integrated financial market is to improve access to the international communications network substantially and to important. The Central Bank of Burundi needs lay the foundations for a national to accelerate the financial sector reform to communications grid that will provide comply with EAC standards and norms. Specific communities and business through Burundi actions would include promoting market access with low-cost voice and data communications. for investors from the EAC, setting up a specific A high priority is attached to the immediate unit responsible for systems and methods of development of a national communications grid of fiber-optic cable and digital microwave payment, and defining a strategy and policy that would be linked to the regional network. modernizing the payment systems and necessary infrastructure in line with the plans of the EAC. 4. Finance 5. Skills Burundi needs to strengthen its financial sector, improve access to financial services, and lower To address the limited availability of skilled their cost. Over the next five years, the country workers and low labour productivity the must focus on domestic issues and view the following could be pursued: joint programs EAC as a benchmark that guides regulation, between public institutions and private firms to supervision, and institutional strengthening. improve technical and professional skills; facilitation of English language programs; Key recommendations include the following: (i) reexamination of labor market regulations, increased stability covering the privatization of increased access to education by making state-owned banks and improvement of schooling available to a larger part of the supervision; introduction of a clearing and real- population, providing more opportunities for time gross settlement system; strengthening technical and professional education, and supervision and institutions dealing with strengthening existing skills; microfinance, establishment of an independent regulatory/supervisory agency in insurance; and Additional guidance regarding the changing management structure, internal implementation and sequencing of these restructuring, and parametric reform of pension recommendations can be obtained from systems; and (ii) improved access by developing Lesotho’s successful experience in addressing typical trade challenges facing landlocked LDC. It is important for Burundi to focus more that high quality infrastructure is in place to strongly on the factors it can influence, namely: facilitate foreign investment and domestic policy reforms to attract new and better FDI and growth; increasing exports by streamlining to ensure foreign investments provide positive customs procedures and upgrading border spillovers to the wider economy. Moreover, crossing infrastructure; and, reforming Lesotho’s experience confirms that immigration regulations to ease the entry of implementing reforms to improve business skilled workers into the market are essential regulation and investment climates; ensuring elements of a successful trade strategy. A key message is that when moving forward in References designing and implementing effective policies for export-led growth and development based on Gillson, I and N. Strychacz, (2010), �Addressing attracting FDI, Burundi should place particular the Trade Challenges Facing Landlocked LDCs: emphasis on improving its business regulation The Experience of Lesotho�, Africa Trade and investment climates. LLDCs that do not Policy Notes no 8, The World Bank. have Lesotho’s proximity advantage will have to Mabushi, E. (2010), Burundi and the EAC - focus even more on these policy issues if they Advancing Regional Integration" The World are to succeed. Within this process, the role of Bank the private sector is crucial. Reaching out to private sector partners, both domestic and World Bank (2010), “Republic of Burundi: foreign, can help attract FDI. Country Economic Memorandum: The Challenge of Achievement Stable and Shared Institutional Reforms: Growth�. Washington, DC: The World Bank. It is essential that the Ministry of East African Community Affairs (MEACA) is staffed with competent personnel, and the necessary About the Authors institutional arrangements need to be in place, requiring extensive capacity building. It is Nora Dihel is a Trade Specialist in the Africa important to implement a coordination, Poverty Reduction and Economic Management monitoring, and evaluation mechanism for all unit. The author would like to thank Jean- EAC-related issues. A coordination mechanism Pascal Nganou and Paolo Zacchia for valuable is critical at this stage. It should include the comments. This work is funded by the Multi- Government, the donor community, the private Donor Trust Fund for Trade and Development sector, and civil society. It can clarify the roles supported by the governments of the United of the potential actors and help maximize their Kingdom, Finland, Sweden and Norway. The contributions. Furthermore, a communication views expressed in this paper reflect solely those campaign aimed at sensitizing the population to of the authors and not necessarily the views of support the integration initiative should be the funders, the World Bank Group or its implemented. Executive Directors.