Tuesday, January 3, 2012

Economic integration in the lower Congo region: opening the Kinshasa-Brazzaville bottleneck

This working paper assesses cross-border economic integration in the Lower Congo region. It focuses on the Kinshasa-Brazzaville conurbation, which is projected to become Africa's largest urban area by 2025, and is already serving as the gateway to large hinterlands. Despite their size and proximity, formal economic exchanges between the two cities are extremely limited. The volume of recorded passenger travel between Kinshasa and Brazzaville corresponds to about one-fifth of the volume of traffic between East and West Berlin during the time of the Berlin Wall, and formal trade volumes are derisorily small. As a consequence, the authors find evidence of statistically significant differences in retail prices, indicating unexploited scope for cross-river arbitrage. Through a survey of firms, they find that local traders perceive substantial scope for increasing cross-border economic activity if cross-river trade costs were reduced. Trade in locally produced goods and by small firms would especially benefit from such reductions. Existing high trade costs mainly result from a lack of competition in cross-river transport services, which are dominated by a duopoly of state-controlled operators. High administrative border costs, exacerbated by the presence of multiple government agencies at the border, act as a further obstacle. Liberalization of cross-river transport and customs reform could yield large economic benefits for local producers and consumers.

This report explores avenues for  cross-border economic integration in the Lower Congo region. We seek to quantify latent trading opportunities, to identify the principal obstacles and to formulate practical policy proposals.Bilateral official trade volumes between DRC and RC, recorded transit trade, and trade with Angola are all found to be small. Formal trade between DRC and RC is lower now than in the 1980s. However, we also find evidence of significant informal trading activity.

Given  its  importance in demographic and economic terms,  we focus on  the Kinshasa-Brazzavilleregion – projected to become Africa’s largest conurbation by 2025, and serving as the gateway to large hinterlands. The link between their capitals turns out to be the main bottleneck for the expansion of economic relations between the two Congos. Small but concrete measures for drawing together such a “natural neighborhood” could open a viable path toward regional integration and offer a complement to more ambitious but institutionally demanding regional agreements. Moreover, policy interventions to facilitate cross-border exchanges will be both  more visible and better enforceable when first implemented between the two capitals than  if attempted in more remote places. Finally, facilitating transport and trade across Malebo Pool, the river basin separating Kinshasa and Brazzaville, will create competing supply routes to and from the Atlantic sea ports, which can act as a form of insurance for the case of interruption of either route.

We find the costs of passenger and goods transport between Kinshasa and Brazzaville to be very high.  A return trip  for one person  on a licensed vessel typically costs between 20 and 40 US dollars,  representing 40 to 80 percent of the average monthly income earned by Kinshasa residents. Trade costs 
for goods across Malebo Pool, a distance of 3.5 km, have been estimated between 3 and 30 percent of FOB values. Some two thirds of these costs consist of border delays and administrative costs. Border formalities for persons and goods are slow, complex and poorly administered. A multitude of agencies 
are present at DRC border crossings in direct violation of presidential orders, restricting their number to four. Bribery, incivility and violence are rife.
Official passenger transport across Malebo Pool is controlled by a duopoly consisting of the two stateowned transport operators. Private operators are licensed under a quota regime and subject to steep fees payable to the duopolists. We find that the price of crossing the river at Kisangani, a comparable setting without a national border, is about 300 times lower than that of crossing Malebo Pool, with the number of passenger crossings nearly 175 times larger on a per-capita basis. The volume of official passenger travel between Kinshasa and Brazzaville corresponds to about one fifth of the volume of traffic between East and West Berlin during the times of the Berlin Wall.

We find that the  high border costs and low traffic volumes are observed in parallel with significant market segmentation, suggesting a causal link. Our survey of retail prices in Kinshasa and Brazzaville shows that average prices of locally produced staple goods are largely equalized across markets within 
each city. When comparing prices across the river, however, we find them to be statistically significantly higher, on both sides, for goods shipped across the river. Our central estimate of this price margin is 20 percent. Despite the dominance of the Matadi-Kinshasa-Brazzaville transit route according to official statistics, prices of overseas imports appear to be somewhat higher in Kinshasa than in Brazzaville.  Such price  differentials point toward considerable unexploited arbitrage opportunities.

Using a purpose-designed company survey, we then estimate likely economic responses to changes in trade costs. We find the trade-cost elasticity of trade across Malebo Pool to be high, possibly even exceeding the value of 1. This means that cuts in  the price of  cross-Pool  transport will stimulate a 
strong expansion of trade – so strong that it might even increase revenue for transport operators and for customs. Trade facilitation across Malebo Pool would promote mainly trade in locally produced goods and trade by small-scale producers. It thus holds particular promise for unlocking local productive 

What can policy makers do? While large foreign-funded infrastructure projects exist on the drawing  board, considerable uncertainty remains over their realization and future viability. Hence, we explore  options for regulatory measures and small-scale donor interventions aimed at unleashing “bottom-up”  local entrepreneurial activity.

We propose  that customs procedures  be brought in line with existing legal prescriptions,  and in  particular that the decreed restriction on the number of agencies present at border crossings be  enforced. Moreover, customs procedures ought to be simplified further, and fare structures should be made transparent. We also propose a liberalization of the cross-river transport market. Such measures would be comparatively cheap, would yield large gains to the general population, should be relatively easy to enforce given the proximity to the seats of government, and could have high symbolic value as evidence of political goodwill between the two nations. 

Our policy recommendations can be taken as complements to more general trade-facilitating reforms through regional trade agreements and customs reform, as proposed in the World Bank’s recent  Diagnostic Trade Integration Study. They also could be seen, at least in the short-to-medium term, as substitutes for the project of building a bridge to link Kinshasa and Brazzaville.  Technical support, adjustment financing and some infrastructure funding from external donors could well be envisaged.

World Bank. Author: Brulhart, Marius ; Hoppe, Mombert. Document Date: 2011/12/01.Document Type: Policy Research Working Paper.Report Number: WPS5909

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