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Abstract

This paper discusses how purposively designed relational governance institutions may be used to engage government and the private sector to promote the growth of environmental goods and services (EGS) markets under the Africa Continental Free Trade Agreement (AfCFTA). The paper distinguishes between a transactional versus relational governance structure and finds that the system of laws, regulations, and practices governing the relationship between government and the private sector in the United States is relational. AfCFTA can benefit from the U.S. experience. There are several agencies and departments that can play a coordinating role to engage the private sector. The U.S. experience suggests that growing the relationship between government and the private sector must be at low administrative cost, trust between government and private sector, information sharing, and common policy vision. The paper discusses challenges, especially land ownership and finance that AfCFTA must address to be successful.

Keywords

environmental goods and services relational governance government-private sector partnership Africa Continental Free Trade Agreement trade and environment

Introduction

This paper discusses an approach to engage government and the private sector to promote the growth of environmental goods and services (EGS) markets within the framework of the Africa Continental Free Trade Agreement (AfCFTA).¹ There is no single definition of an “environmental good and service.” Rather, governments, international and regional trade organizations have developed lists of goods and services that positively improve or eliminate problems in the physical environment and labeled them “EGS.” Thus, there are ASEAN, European Union, and U.S. lists, all driven by trade policies, natural resource base, and socio-economic characteristics of countries (de Melo & Solleder, 2020; European Environmental Agency, 2018; Clayton et al., 2021; U.S. Department of Commerce/International Trade Administration, 2020; World Bank, 2020).

This paper applies a relational contract theory to study characteristics of the governance regime used by the United States and the private sector in growing a robust and profitable EGS industry.² The governance regime includes the institutions, rules, regulations, and norms within which the government and private sector interact (North, 1999; Williamson, 1979). The lessons from the United States are examined for possible application to the AfCFTA. This is an opportune time to discuss this topic because the current AfCFTA does not contain any specific provisions on EGS markets. There is potential for Africa to cash in on emerging green markets given their rich natural resource base, especially if the private sector is energized as the “engine of growth” to play a leading role (African Development Bank. (n. d)). However, these hopes and expectations are not self-executing. Achieving these goals requires purposively designed market-based governance institutions that operate to maximize benefits from collaboration between government and private sector.

The theoretical framework discussed in this paper was used in an earlier paper on the governance regime supporting the water transfer treaty between the Republic of Lesotho and the republic of South Africa (Boadu, 1998). The principles discussed in the treaty paper are relevant to analyzing the relationship between government and the private sector in growing EGS markets in Africa. Thus, the extensive and in several paragraphs verbatim reproduction of wording from the Treaty paper is unavoidable.

Section II discusses background and context of the paper under three themes—a. the economic environment when AfCFTA was signed, b. characteristics of AfCFTA and projected benefits, and c. the EGS market, and the arguments in support of focusing on green markets. This sub-section is discussed under three themes: i. Environmental Provisions under AfCFTA; ii. Green Markets, and iii. Private Sector. This is followed with a discussion of concepts from contract theory to identify the efficiency-promoting characteristics of the governance system between parties in any contractual interaction in Section III. We examine contracts on a continuum with a transaction at one end and a relation at the other end. A transactional relationship is a one-shot interaction, while parties in a relational transaction deliberately work towards a long-term ongoing relationship. These concepts are applied to the interaction between the EGS industry and the government in the United States in section IV, and to the AfCFTA in Section V. We discuss some challenges in implementing the partnership between the private sector and AfCFTA in section VI, and present conclusions and policy implications in Section VI.

Background and Context of Paper

The Economic Conditions in Africa at Implementation of the AfCFTA

AfCFTA was introduced at a very difficult economic and political period in Africa’s development using the Sustainable Development Goals (SDGs) as yardstick. The United Nations (UN) (2015) defined 17 SDGs and 169 targets and used a set of quantitative global indicators to measure, monitor, and review the progress of countries in achieving the SDGs (United Nations & Department of Economic and Social, 2015). One of several reports prepared by the UN is the Africa SDG Index and Dashboard Report, which “examines where African nations stand in relation to achieving the SDGs and the African Union (AU) 2063 Agenda—particularly some measures of continental integration, a core component of this African agenda (Africa Union (d). (n. d)).³

The latest Report 2020 presented two measures to determine the performance of African countries. The first measure uses baseline numbers to determine whether there is an improvement, stagnation, or decline from the baseline. For example, one may use the number of girls enrolled in secondary schools in a country in the year 2000 as base, and measure the number enrolled in 2010 to determine changes from the base year. A second measure is the principle to “leave no one behind” (LNOB), which captures inequalities in income and wealth; in access to public services and infrastructure; gender inequalities; and in access to food, health, education, and outcomes related to human development”(World Bank. 2021).

African countries are not meeting majority of the targets set for 14 of the 17 SDGs. According to the report, 87% of countries are facing major challenges in achieving the health and wellbeing goal (Goal 3); 78% is facing challenges in meeting the infrastructure (Goal 9) and the peace, justice, and strong institutions goal (Goal 16); and 74% cannot meet the affordable and clean energy goal (Goal 16). The performance is even lower when measured with the LNOB standard. The report concluded, “The stark conclusion is that all African countries are currently struggling to leave no one behind with major challenges in extreme poverty and material deprivation, access to and quality of services, and gender inequality.” There were moderate achievements that support the discussion in this paper. The best scores are for addressing “income inequality” category, “only 20% of countries are not meeting the climate action goal (SDG 13), and only 7% are not meeting the ‘responsible consumption and production goal’” (SDG 12) (Id.)

In addition to the economic declines, the Freedom House ranked only six countries in sub-Saharan Africa as “free” (Freedom House, 2023). African countries are experiencing shortfalls in development financing with declines in ODA support (Ighobor, 2020). Countries face a heavy debt stock with the total debt stock rising from $266 billion in 2009 to $625 billion in 2019 (African Development Bank Group, 2021). The mix of creditors along with the mix of financial instruments has made debt negotiations complex and costly. The major credit holders in 2009 were 149 multilateral and bilateral agencies, and grew to 392 in 2019, and the number of private creditors grew from 43 in 2009 to 168 in 2019 (World Bank, 2021). This debt burden should inform all discussions because the ability to attract investors will be key in growing the Green Market.

There are two main takeaways from this summary of Africa’s economic condition at the birth of AfCFTA. First, the few bright spots where African countries are making any progress towards achieving the SDG are those related to the environment, particularly climate, “responsible consumption and production,” and income inequality. Second, AfCFTA is expected to generate enough economic activity to meet current and future SDGs. Given the global interest in the environment, there is political will to build private sector partnerships in support of green markets under AfCFTA. We are using “political will” guardedly given the history of governments not doing what is promised to citizens of the country. Furthermore, there is the immense challenge of coordinating political will at the regional and sub-regional levels.⁴

Characteristics of AfCFTA and Projected Benefits

The AfCFTA agreement is the largest free trade area in the world measured by the number of countries participating. The pact connects 1.3 billion people across 55 countries with a combined gross domestic product (GDP) valued at US$3.4 trillion (Africa Union, “About AfCFTA”) (undated). The AfCFTA includes provisions that are important to growing an EGS market because “the agreement will reduce tariffs among member countries and cover policy areas such as trade facilitation and services, as well as regulatory measures such as sanitary standards and technical barriers to trade. Full implementation of AfCFTA would reshape markets and economies across the region and boost output in the services, manufacturing, and natural resources sectors,” (2020^1,^2,^3,^4,⁵). The World Bank study projects gains in real incomes, expanded trade with the rest of the world (19%) and within Africa (110%). The manufacturing sector is projected to expand significantly by about 62% (2020). The distributional impacts of the AfCFTA are compelling. The AfCFTA is projected to lift over 30 million people out of extreme poverty, and an additional “68 million people from moderate poverty and help minimize the vicious impact of the COVID-19 pandemic” (2020).

The 2020 study found that removing tariffs and non-tariff barriers (NTBs) on intra-AfCFTA trade and implementation of Trade Facilitating Agreements (TFAs) would add over US$556 billion to the economies of the Treaty states. The estimate by the African Development Bank (AFDB) is much smaller at US$92 billion. The model, methodology and data used in a study explain the differences in the values of estimated benefits from AfCFTA. The African Development Bank (AFDB) also released a report on the AfCFTA and concluded that, there could be over $100 billion in net gain from the treaty (African Development Bank, 2019). Experts from the influential Brookings Institution (2018) have also discussed the AfCFTA Treaty and found it credible in achieving some of the development goals of the continent. The projected benefits from the agreement, whether in terms of impacts on the general economy or specifically on environmental markets, will depend on the participation of private industry.

Environmental Provisions under AfCFTA, Green Markets and Private Sector

Environmental Provisions under AfCFTA

There are no provisions on “environmental law” under the current AfCFTA. The omission of environmental provisions is not fatal to the operation of the treaty because there are several agencies within the Africa Union, along with a host of environmental laws and regulations that collectively address the air, water, soil, and natural resource management issues. Furthermore, “environmental law” is not considered a “core” issue in trade agreements (Hofman, Osnago, and Ruta, 2017). Environmental concerns permeate the development objectives of the Africa Union, “to promote sustainable development at the economic, social, and cultural levels as well as the integration of African economies” (African Union (b). (n. d)). This objective, captured under Goal 7 of Agenda (2063), has become one of the key aspirations under the Africa Union’s Agenda 2063 (African Union (a). (n. d)). The challenge has always been how to draw the line between trade and environmental issues so that a trade organization does not become an environmental organization.

Green Markets and Relevance to AfCFTA

A report by the African Development Bank states, “In Africa, green growth will mean pursuing inclusive economic growth through policies, programs and projects that invest in sustainable infrastructure, better manage natural resources, build resilience to natural disasters, and enhance food security” (Granoff & &Vyas, 2012). The report states further, “The AFDB believes green growth can yield the greatest impact on Africa’s most pressing challenges within these focal areas. The first two respond to the challenges outlined in the beginning of the paper related to food insecurity, infrastructure deficit, and natural asset management while the third area responds to climatic and economic shocks” (Id.). Despite Africa’s low contribution to global carbon emissions, it is to the advantage of African countries to participate in the search for solutions to global environmental issues because the science points to devastating consequences due to inaction (Niang et al., 2014). Furthermore, non-participation would deprive the private sector an opportunity to generate employment and income to improve livelihoods.

Private Sector Opportunities

Africa has not developed any systematic market plan or vision for the growth of EGS markets as we find in Asia, Europe, or North America. However, the market is expanding. The 1996 market value was estimated at $2 billion, with a 10% annual growth rate according to the U.S. Department of Commerce/ITA’s Environmental Technologies Export Handbook 1995. The Handbook listed two countries from sub-Sahara Africa—Kenya and Nigeria as viable markets for EGS (U.S. Department of Commerce/International Trade Administration, 2020). The 2017 Handbook ranked countries with the highest potential for U.S. EGS involvement (U.S. Department of Commerce/International Trade Administration, 2017.

There were four rankings, a composite ranking (overall), and individual ranking for air pollution, water pollution, and waste management. The composite ranking shows that nine members of AfCFTA are among the top 50 markets identified by the ITA (Id.). The 2017 report shows that 10 AfCFTA countries were included in the top 50 for water technology: 10 for air pollution technology, and 11 for waste treatment (Id.). The 2019 report composite ranking shows that 13 members of AfCFTA are among the top 50 markets identified by the ITA (U.S. Department of Commerce/International Trade Administration, 2020). The report also shows that 16 AfCFTA countries were included in the top 50 for water technology, 12 for air pollution technology, and 8 for waste treatment (TOP Markets Rankings).

Results from an empirical study on import demand for EGS in Africa support the optimism expressed in this paper (Avery & Boadu, 1998). The study estimated the elasticity of import demand for “four environmental goods categories—air pollution, water pollution, instruments, and solar equipment for seven major importers in SSA—Ghana, Nigeria, Kenya, Zaire, Zambia, Zimbabwe, and South Africa.” Even though the study used data covering the EGS market in the 1990s, the results are relevant today and may shed some light on the policies to improve market performance. For example, the study found that a 10% increase in growth will lead to about a 5% increase in environmental goods demand in SSA, confirming the strong relationship between the overall economic performance of a country and improved environmental quality.

The study also confirmed that reducing Africa’s mounting debt would improve the EGS market. A 10% increase in the debt of sub-Saharan Africa, for example, was predicted to lead to about a 28% decrease in the demand for EGS (Avery & Boadu, 1998). The study also found that, “a 10% increase in economic liberty leads to over a 38% increase in EGS demand, confirming the positive relationship between freedom and market growth. The level of carbon emissions was not statistically significant in explaining EGS import demand, and as expected, water pollution equipment import price demand elasticity (9.04) was high and significant at the one percent level. A 10% decline in water pollution equipment price would lead to a 90.4% increase in water pollution equipment import demand.

It is against this background that some studies suggest the development of “green markets” as a foundational goal for African countries (Sperling et al., 2012). An understanding of factors or combination of factors (economic, political, and social) influencing the growth of the “green markets” is useful at this stage when the AfCFTA has left room to plan impactful environmental goods regime based on public-private sector partnerships.

Theory of Relational and Transactional Governance Regimes

Economists have extended the classical and neoclassical contract theories to explain the interaction between private parties in the marketplace under different contractual governance regimes. The basic premise of the extension is that parties weigh the benefits and costs of entering a relationship, and therefore would search for the appropriate organizational structure (governance regime) which minimizes the cost of their interaction (Williamson, 1979). The governance regime is defined by the complex rules, regulations, and practices that influence decisions made by parties to a contract. The theory considers contracts on a continuum with a transaction at one end and relation at the other end. Information shared by parties, approaches used in bargaining, and enforcement of agreements are factors to consider when classifying a contract as transactional or relational. The early development of the principles to determine whether a contract is transactional or relational was introduced by Macneil (1974, 1978) and Williamson (1979). These studies focused on interactions between firms, for example, whether two firms deliberately trade information to minimize search costs, or whether each behaves strategically and hides relevant information from the other. This latter situation describes a transaction, and the previous scenario describes a relation.

The principles used to explain the contractual relations between private parties and firms in the market have been extended to diverse situations where two or more entities interact, for example, relational aspects of employment (Bird, 2005), marriage (Scott & Scott, 1998), international treaties (Boadu, 1998; Wessel, 2004), long-term strategic partnerships (Frydlinger et al., 2021), comparison of relational and transactional contracts (Frydlinger et al., 2021), construction contracts (Cheung et al., 2006), and contracting in a digital age (Snyder (2005). We extend these applications to the interaction between government agencies and private sector entities to grow green markets in Africa.

The classification of contracts as transactional or relational is not an exact science. A basic distinction between these two contracts structures is that “transactional contracts view the parties as economic forces, while relational contracts view the parties as human beings” (Frydlinger et al., 2021). The essence of characterization of a contract as transactional or relational is “to categorize contract transactions and relations along some kind of behavioral lines” (Macneil, 1974). By carefully examining the language in documents defining the relationship and understanding of the parties’ aspirations, hopes, benefit and cost-sharing, approaches to solving disputes, and other considerations, one can predict the choice of governance regime the parties seek under their agreement. Where the language, duties, and responsibilities convey a sense of a “one-shot” deal, the parties intended a transactional contract, and where there is a sense of continuity and conscious effort to jointly minimize costs by reducing risks and avoid opportunism, shirking, and shading, a relational agreement is intended (Frydlinger et al., 2021; Klein, 1979; Muris, 1981; Williamson, 1979).⁵ The cost that parties seek to jointly minimize is the transaction cost, defined as (a) the information, (b) bargaining, and (c) policing costs associated with the agreement (Polanski, 1983). In addition to minimizing transaction costs, researchers have identified (d) trust and trustworthiness as important elements in defining the relationship between parties in a contract.

Information Costs

Parties to a contract need information about each other, the subject matter of the contract, and present and future contingencies in making decisions about whether to participate in transactional or relational contract. The information cost could be prohibitively high due to uncertainty and strategic behavior of one party to the contract. Both technical or specialized knowledge and information about the global EGS marketplace and predicting what foreign competitors are planning are all costly to obtain. Private parties need information about government agencies’ plans for technology development and purchases since the government is a major consumer of EGS.

Bargaining Cost

Each party in a negotiation attempts to obtain concessions from the other party through bargaining. Bargaining could be time consuming and, depending on the goal of the contracting parties, costs associated with the process can be substantial. For example, one party may behave strategically or adopt “hold out” tactics. In contrast, parties may deliberately follow a cooperative approach to reduce bargaining costs and capture economies (Goetz & Scott, 1981). Techniques such as “good faith” bargaining and “best effort” to arrive at a mutually beneficial conclusion help reduce bargaining costs (Bilder, 1981). Parties may adopt “guiding principles” to address unanticipated situations (Frydlinger et al., 2021). Bargaining may be eliminated if the other party’s offer is unilateral. For example, a government agency may issue a solicitation that specifies a task to be performed, and all qualifications required along with payment for the service.

Policing Costs

Policing costs are costs incurred to ensure performance by the other party (Polanski). Parties may renege on their commitment in several ways including outright refusal to perform, performance below a required standard, shirking of responsibility, or engaging in opportunistic behavior (Muris, 1981; Klein, 1979). Private parties use explicit strategies such as stating a penalty for non-performance in the contract document, and implicit strategies such as tying the agreement to other benefits from the contract (Bilder, 1981). Policing, the relationship between a government agency and the private sector, occurs in two stages. First, the agency must police the activities of private entities, and second, some entity must police the activities of the agency. Private entities are unlikely to under-perform under the agreement because the government is such a major consumer of EGS. Agencies are policed simply with reporting requirements defined in statute. Agencies must report to Congress whether they accomplished the objectives to grow the private sector in the EGS industry.

Trust and Trustworthiness

A cross-cutting principle influencing parties’ incentive to engage in low-cost relational interaction is trust and trustworthiness. A relational signaling theory has been used to explain interpersonal trust building and the crucial role of actions that signal trust and trustworthiness (Six, Nooteboom and Hoogendoorn, 2010). Trustors look for two things in the behavior of trustees to determine whether a signal seeks a relational outcome. First, they check if the behavior shows the competence to perform according to expectations (the ability dimension of trustworthiness). Second, trustors look for signs in the behavior of trustees indicating whether the trustee is interested in maintaining the relationship in the future (the intentional dimension of trustworthiness) (Six, Nooteboom and Hoogendoorn, 2010). The above discussion hardly exhausts the many possible factors that distinguish a relational interaction from a transactional interaction.

Two key points must be kept in mind. First, the determination of a relational or transactional governance structure is based on the nature of an interaction in its entirety. It is the deliberate and purposive effort on the part of parties to economize on costs and share benefits through cooperative undertakings that define a relational interaction. Second, trust and trustworthiness are foundational elements of a relational governance system. Thus, in addition to searching for low transaction cost approaches used by the United States, the paper also explores strategies used in building the ability and intentional dimensions of trust and trustworthiness.

Application to the U.S. EGS Market

The United States has developed the EGS market using purposively designed relational governance approaches between the government, represented by the Environmental Trade Working Group (ETWG) of the Trade Promotion Coordinating Committee (TPCC), and the private sector represented by the Environmental Technologies Trade Advisory Committee (ETTAC). We examine the substantive language and procedural mechanisms found in key legislation, regulations, case law, and public documents to determine how the government and private entities made a conscious effort to jointly minimize costs by pursuing a relational rather than a transactional governance regime.

Information Sharing

The President, acting through the Secretary of Commerce is responsible for implementing laws affecting the EGS market. The Secretary is assisted by the Trade Promotion Coordinating Committee (TPCC). There are two arms of the TPCC, the Environmental Trade Working Group (ETWG), a technical group that advises the TPCC and is composed of primarily government agencies, and the Environmental Technologies Trade Advisory Committee (ETTAC) located within the International Trade Administration in the Department of Commerce and is composed of private industry representatives. The interest of the private sector enters directly into the policy process through the activities of ETTAC serving as an advisory body to the ETWG of the TPCC, which reports directly to the Secretary of Commerce. The organizational structure promotes the achievement of several least-cost (efficiency) outcomes. Below are four purposive least-cost information sharing approaches used by the United States to grow the EGS market.

Low Administrative Cost

The cost of administering the relationship between the government and private sector is relatively low. The ETTAC Committee operates on a very lean budget, and the cost of participation is borne by the individual members of the committee. “Costs associated with organizing meetings, communication, printing, staff time etc. amounted to $59,847 in 2020” (U.S. Department of Commerce (undated)). The amount represents a minute share of the over $700 million 2024 budget of the office for International Trade (U.S. Department of Commerce (undated)). Private sector members of the ETTAC are not compensated for their services or reimbursed for their travel expenses (U.S. Department of Commerce (undated)). The low cost of managing the partnership between government and the private sector suggests that the high growth of the U.S. EGS industry is due to the willingness of the parties to jointly reduce information costs using a seamless system of information flow.

Minimizing Dissonance in Policy and Practice

The interaction between the Environmental Trade Working Group (ETWG) and the ETTAC minimizes policy objective conflicts to achieve a relational outcome. Private businesses benefit from knowing government priorities and financial commitments to develop appropriate market strategies. Government agencies gain information about business and industry capacity and innovations. The relationship allows the private sector to share their experiences in foreign markets, and the policies needed to eliminate identified constraints. The government has adopted industry practice in defining the EGS market to eliminate confusion. An advantage in following industry definitions and classification (ISIC Code) is that trade flows are measured with a common transparent standard. Using the ISIC Codes, we can identify and measure the type of EGS product or service we seek to promote in the market.

Legitimacy and Trust

Legitimacy and trust in market interaction reduce costs and promote relational governance system. U.S. policy on the EGS market, institutions to implement the policies, oversight, and reporting requirements are all stated in legislation passed by Congress. Trust is the deliberate choice by parties to minimize the cost of governance and achieve efficiency outcomes (Williamson, 1979, 1993a, 1993b). Six, Nooteboom, and Hoogendoorn’s two dimensions test of trustworthiness is applicable to trust building between the private EGS sector and the U.S. government. The authors identified the ability and intentional dimensions of trustworthiness. The ability dimension checks whether the private sector can perform the tasks advertised by the government. This dimension is satisfied under the U.S. governance system because invitation to the public to submit ETTAC membership application is clear on the technical expertise of qualified applicants. If a private entity does not meet the technical requirements in the public notice, they are simply not invited to join the ETTAC. All selected members can perform the tasks announced in the public notice.

The intentional dimension of trustworthiness considers the long-term interest of parties. Under the U.S. regulatory scheme, the Secretary of Commerce selects the members of ETTAC through open invitation to the public (U.S. Department of Commerce/International Trade Administration, 2020). The selected members of ETTAC are issued a “Charter,” the centerpiece of the governance system defining the relationship between the government and the private sector. The “Charter” is a written document to guide the operations of ETTAC, and conditions of service. “Charters” expire after two years, and the Secretary will issue another call for new members with a new Charter. A review of Charters since 2014 shows repeat membership on ETTAC by the water, wastewater, air, and environmental consulting industries. The repeat representation has built trust between the government and the private sector. The legitimacy of the governance system is not in question because the selection of membership to ETTAC, ETWG, and the TPCC, their roles, oversight, and reporting requirements are defined by statute, thereby grounding the relationship in the power of the state.

Signaling of Government Priorities

The private sector would incur high search costs if the government did not provide signals on priorities. The government lists EGS market products and services development priorities in the invitation to private industry to join the ETTAC. Even though the definitions and classification of the EGS market are based on private industry standards, the adoption and publication by the government provide additional confirmation of the government’s long-term commitment.

Bargaining Cost

Bargaining occurs between the private sector group, ETTAC, and the ETWG, representing the government. Bargaining costs are lowered because the roles and issues that fall within the bargaining space are clearly defined. The government defined these areas of interest considering the overall U.S. strategic objectives—political, economic, national security, etc. This objective is achieved because the output from the interaction between the ETTAC and the ETWG goes to the TPCC, which is populated by high-level administrators from all federal agencies, including National Security. It would be extremely costly if industry had to seek and identify all individual agencies’ priorities to do business. The low cost of bargaining reflects the relational outcomes that the parties seek.

The outcome of the bargaining process is a document containing a set of recommendations submitted to the TPCC. Unlike what one observes in private markets, where bargaining outcomes are sometimes reduced to enforceable contractual obligations on parties, the bargaining outcome from the ETTAC and ETWG interaction is a set of non-binding recommendations. ETTAC’s outputs are advisory on policies supporting the EGS businesses (15 U.S. Code § 4728 (c). For example, the 2014–2016 recommendations covered issues in trade liberalization, trade promotion, professional services, standards, regulations, and certifications (Environmental Technology Trade Advisory Committee (ETTAC) 2014–2016). ETTAC submitted twenty recommendations in the 2016–2018 report (Environmental Technology Trade Advisory Committee (ETTAC) 2016–2018). The recommendations focused on NAFTA and the WTO and discussed issues covering, trade policy and American competitiveness, trade promotion and export market development, professional services, and infrastructure advancement. The 2018–2020 recommendations focused on U.S. bilateral and multilateral engagements, including, the United States–Japan Trade Negotiations, United States–EU Trade Negotiations, and U.S. competitiveness among other issues (Environmental Technology Trade Advisory Committee (ETTAC) 2018–2020).

Policing Cost

Policing of the outcomes from the interaction between the government and private sector is determined by the reporting requirements set by law, “the chairperson of the TPCC shall prepare and submit to the Committee on Banking, Housing, and Urban Affairs of the Senate, and the Committee on International Relations of the House of Representatives, not later than March 30 of each year, a report describing (1) the strategic plan developed by the TPCC, and (2) the implementation of sections 5823 and 5824 of title 22 concerning funding for export promotion activities and the interagency working groups on energy of the TPCC”(15 U.S. Code § 4727 (f) Report to Congress) Congress oversees the commitments made by the TPCC as part of its oversight responsibilities, and bears the cost of the oversight.

In summary, the essential characteristics of the U.S. EGS market governance regime consist of a deliberative creation of a low-cost platform for the exchange of information. The policy is grounded in legislation to give it legitimacy, reduce the cost of investing in preventing opportunistic behavior and policy dissonance. In a sense, the problem of policy dissonance is moot because the government is formulating policies using industry definitions and nomenclature. The platform allows the government to build trust by gaining knowledge of private sector capacity and reliability in meeting expectations. The outcome of the bargaining process is a set of recommendations that shape the government’s stance in market access negotiations with trading partners. Policing and oversight are also governed by legislation with annual reports from the Executive Branch to Congress.

Application to the AfCFTA Green Market

We characterized the relationship between the U.S. private sector entities and the government as “relational,” that is, the parties made deliberate effort to reduce the transaction cost of their interaction to capture maximum benefits. It must be noted that the governance regime in the United States differs in important ways from the AfCFTA. The arrangement in the United States is between a single government entity (Federal government), interacting with U.S. citizens. The AfCFTA is the creation of the Africa Union consisting of 55 sovereign member countries. Private sector entities in the green market may be citizens from these many countries with their own laws and regulations. Several departments and agencies within the Africa Union may play the lead role (Federal government) in coordinating the interaction with the private sector, recognizing the importance of keeping the cost of coordination low.

As in the case of the United States, we rely on analysis of the activities of existing environment institutions, the AfCFTA Treaty document, along with published public materials in discussing how U.S. EGS market experience may guide the establishment of an environmental goods market governance regime under AfCFTA. The objective is not to transplant U.S. environmental institutions without interrogation of fit to cultural and traditional business practices in African countries. Rather, the objective is to determine how the outcomes made possible by deliberate setup of governance institutions have led to the growth of the EGS market in the United States. Our review shows that there are opportunities for strengthening the interaction between African governments represented by AfCFTA and the private sector to lower transaction costs and grow a sustainable EGS market.

Information

Low Administration Cost

The lesson from the U.S. system is that the government and private sector created a low-cost administrative system and information sharing platform to achieve a relational outcome. There is no identifiable formal platform dedicated to the exchange of information on growing the green market in Africa. We recommend the formation of such a formal platform. Following the U.S. model, several existing agencies within the African Union could perform the coordinating functions of bringing the African private sector together with the African Union designated entity to grow the EGS market. We are not particularly concerned about what agency or Directorate is employed by the African Union to undertake this coordination function. The only requirement is that the selected institution must provide a low-cost platform for interaction. The private sector must bear some of the cost of participating in the partnership, and members of the private sector must not be representatives from government agencies in member countries.

Minimizing Dissonance in Policy and Practice

African countries face a difficult challenge in planning and implementing common environmental rules and regulations to promote EGS because there are many countries in the decision-making process. However, what seems an insurmountable challenge is rather an opportunity for African governments to learn from the private sector about how to harmonize trade laws in green markets. Our proposal for a low-cost common platform for interaction will eliminate dissonance in policy and practice. For example, suppose an initial group of five private EGS market participants from different African countries—South Africa, Nigeria, Egypt, Kenya, and Rwanda have announced an interest in a formal working relationship with the Africa Union to promote green markets. This is an opportunity for the AU to learn about who is in the market, what they produce, where they sell their products, how they are affected by their domestic laws, and what they consider to be options for addressing the constraints. The platform proposed in this paper is an effective approach to eliminate dissonance since the rules governing the market are private sector driven and issues have been discussed and decisions made in a common forum.

Legitimacy and Trust

The vision of an African green market is grounded in both multilateral commitments under the WTO, and in official documents establishing the African Union. At the global level the Doha Ministerial Declaration (DMD) mandated Negotiations on “the reduction or, as appropriate, elimination of tariff and non-tariff barriers to environmental goods and services” (World Trade Organization, 1996). At the continental level, Africa’s Agenda 2063: The Africa We Want contains scattered references to the importance of the private sector in achieving the SDGs (African Union (a). (n. d)). The first aspiration under the agenda is “a Prosperous Africa, based on Inclusive Growth and Sustainable Development (African Union (b). (n. d)). Also, the African Union Commission launched a five-year continental Green Recovery Action Plan 2021–2027 that “provides an opportunity for countries to embolden action on climate finance, energy efficiency, biodiversity, resilient agriculture, and green cities” (Nyambe, 2021). Broadly, the plan will support “renewable energy, energy efficiency and Nature-based solutions and focus on biodiversity through work on sustainable land management, forestry, oceans, and ecotourism (African Development Bank Group, 2021). The Plan is coordinated under the Africa Adaptation Acceleration Program (AAAP) “to mobilize $25 billion to scale up and accelerate climate change adaptation actions across Africa” (African Development Bank Group, 2021, 2023). The partnership proposed in this paper is legitimate under both the global and continental rules and regulations governing green markets.

It is premature to determine whether the relationship between the African Union and the private EGS sector meets the ability and intentional dimension of trustworthiness. The ability dimension checks whether the private sector can perform the tasks advertised by the government. The intentional dimension considers the long-term interest of parties. On the ability dimension, the African Development Bank regularly invites private entities to submit applications on advertised projects where applicants are reviewed on technical qualifications (African Development Bank Group. (n. d)). One may argue that both the AFDB and private entities pursue their own long-term interests, thus satisfying the “intentional” dimension of trustworthiness. However, there is no evidence of an ongoing joint deliberative process that shows whether the private sector participated in the determination of priorities and strategies to reduce the transaction costs inhibiting the growth of green markets. The interaction between the AFDB and the private sector may be described as transactional. Providing a common platform for joint ongoing decision-making about minimizing the cost of participating in the green market will shift the pendulum towards a relational outcome.

This does not deny private sector involvement in green markets in Africa. For example, the 25th Ordinary Session of the Assembly of Heads of State and Government of the Organization of African Unity (OAU) in 1989 proclaimed the 20th of November Africa Industrialization Day. The same date was set aside annually as Africa Industrialization Day by the United Nations General Assembly (UNGA) in 1989 (Africa Union, 2020; United Nations). The event was attended by the “private sector, diaspora, African governments, youth, women, and international cooperation partners, among several stakeholders” (id.). Private sector participation in these events serve more to increase public awareness and demonstrate government commitment, than as a deliberative forum to discuss how to minimize the transaction costs facing private industry operating in green markets.

Signaling of Government Priorities

As in the case in the United States, the AfDB has signaled its priorities. The signals from the government in the United States and those from the AfCFTA are similar and directed to a specific environmental good or service need. The signals from the AfDB are general and reflect the broader policy objective of the Africa Union. Private entities with the technology and financial resources and wish to participate in the environmental goods and services market in SSA, may consider initiatives in providing electricity, rail network, reducing the aggregate demand on natural resources, reduce deforestation, address climate change problems, improve health facilities, provide early warning systems, providing ecosystem services, and manage post-harvest losses. The African Development Bank Group lists over 4000 projects and programs undertaken under these broad categories of the EGS market (African Development Bank Group, 2021).

Bargaining Costs

Bargaining is reduced in the United States because the invitation sent to the private sector includes a list of government priorities. The invitation sent out to the private sector is a unilateral contract that leaves little room for bargaining. Bargaining issues do not arise at this stage of discussion because there is no established private sector entity yet in Africa that functions as the Environmental Technologies Trade Advisory Committee (ETTAC) in the United States.

Policing Costs

Policing within the AfCFTA framework need not be complex and may be one of the many annual reports submitted by the designated coordinating agency or department selected by the AU Commission. The report will include information on the membership of the partnership; number of meetings between the AU representative and the private sector; the types of constraints reported by private entities; recommendations by the private sector; and responses and actions taken by the AU to address the concerns expressed by the private sector in the effort to grow green markets in SSA.

Challenges in Growing Green Markets in Africa

Define Effective Property Rights to Land and Forest Resources

Properly defined property rights to land and natural resources are important in growing the green market in sub-Saharan Africa because the bulk of the wealth of countries, estimated at 23% comes from land and natural capital resources (Clayton et al., 2021; Heren et al., 2012; World Bank, 2021). Furthermore, the exploitation of forest resources in support of the EGS market will affect the livelihoods of indigenous populations. The private sector is in the best position to address this complex issue because they are engaged in direct negotiation with landowners for the exploitation of forest resources to support the EGS market. Governments’ roles in negotiating large-scale land contracts on behalf of indigenous landowners are fraught with high transaction costs and inequities (Aryeetey and Lewis, 2010). The proposed AfCFTA platform may include deal rooms and one-stop systems to further lower transaction costs facing EGS market participants.

Increase Intra-African Trade

The green market is not included as a separate sector in the CGE model used by the World Bank to project trade impacts under AfCFTA. However, some EGS-related sectors such as agriculture, manufacturing, fossil fuels, water transport, energy intensive manufacturing, chemical, rubber, and plastic products, that all show growth under the model scenarios are included. One study finds that African countries have not participated in identifying what constitutes an environmental good or service within the global trading system WTO (de Melo and Solleder, 2020). African countries must work with private sector entities in Africa, and with technology owners from industrialized countries as partners to develop green products lists that expand intra-African trade and in global markets.

Financing

Funding the management of the private sector-government governance regime covers meeting, communication, travel, and generally administrative costs. As the U.S. model shows, funding for these activities is low, and entails some reallocation of current staff responsibilities for managing meetings, correspondence, and general protocols for meetings. The private sector paid for their own transportation and other meeting costs. We propose the same approach for the AfCFTA. The agency within the AU system charged with growing the private sector participation must allocate some administrative time to the management of the governance system. The willingness of private parties to pay for the cost of their participation is a measure of their commitment to achieve the goal of growing green markets.

Lack of Regulations for Green Technology and Role of Third Parties

TOP Market Reports project the global Green Technology and Sustainability market size to grow from USD 11.2 billion in 2020 to USD 36.6 billion by 2025, at a Compound Annual Growth Rate (CAGR) of 26.6% during the forecast period (Top Market Report, undated). This growth must be supported by appropriate “uniform legal framework.” An appropriate legal and regulatory framework is important if collaboration with owners of green technology in developed countries is anticipated. As in the United States, we recommend minimum citizenship requirement, such as 51% Africa-based ownership. All countries have regulatory bodies for approval of technology transfer, but these are poorly resourced, and enforcement of contracts is costly (Markets and Markets, 2024).

Conclusion and Policy Implication

This paper discussed how the United States developed a relational governance system between government and private sector to grow the EGS market. The paper used contract theory to classify the governance regime as transactional or relational, and based on a review of laws, regulations, and practice, concluded that the U.S. governance regime is relational. The U.S. EGS market governance structure is purposively designed to operate at low administrative cost, promote free flow of information, and build trust between government and private sector. The private sector performs an identifiable role in making policies about the EGS market because government relies on their market experiences in planning and implementing policies. There is no policy dissonance because the government uses private industry-defined market measures (ISIC) codes in planning and policy making. Policing the outcomes from the interaction is undertaken at a low cost in the form of yearly reports submitted to congress. Congressional oversight is further evidence of the legitimacy of the interaction between government and the private sector in growing EGS market in the United States, even though advisory is still a critical input in formulating policies to promote the competitive position of private industry in international markets (Crocker, 1971; Sai et al., 2006; World Bank. (n.d.); United Nations/Department of Economic and Social Affairs. (n.d.); World Bank 2021; Federal Register. (n.d.)).

A review of AfCFTA official documents, research publications from leading development institutions, and expert opinions suggest that a formalized relational governance regime to grow the EGS market under AfCFTA and private industry in Africa may be developed at relatively low additional cost. Several departments and agencies within AfCFTA may perform the coordinating role much as the Environmental Technologies Trade Advisory Committee (ETTAC) set up by the Secretary of Commerce in the United States. Both the African Development Bank and the Africa Union have well established procedures for engaging the services of private entities. The established private sector institution must have regularized meetings to share information about the state of the global and Africa’s green markets and challenges in operating in the market. Unlike the United States, AfCFTA must address the problem of coordinating domestic laws and regulations by 55 member countries influencing policies. The proposed private sector entities must lead the search for harmonizing governance systems to grow the green markets. The leadership of the private sector is especially critical in defining workable contracts that support equitable exploitation of forest resources belonging to indigenous people. In a broader policy context, this paper highlights the need for a holistic approach to growing green markets in SSA. Despite the projected benefits of AfCFTA, the analysis shows that the projections may be a mirage unless fundamental issues in land rights, especially rights of indigenous populations and vulnerable groups including women are addressed.

Footnotes

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Frederick O. Boadu

Notes

Author Biography

Frederick O. Boadu is a Professor in the Department of Agricultural Economics at Texas A&M University, College Station, Texas. He obtained his doctorate in Agricultural Economics from the University of Kentucky, and a law degree from Georgia State University. Dr. Boadu’s teaching, research interests, and academic publications are focused on agricultural law, environmental law, and the law and economics of institutional design and change. He has presented lectures on biosecurity, climate change, water resources law in Texas, and bioenergy development. Dr. Boadu has traveled widely in Africa, and served as a consultant on projects in several sub-Saharan African countries working with several bilateral and multilateral organizations on economic development projects. He is a Science Policy and Diplomacy Fellow of the American Association for the Advancement of Science (AAAS).

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Africa Continental Free Trade Agreement Can Benefit From U.S. Experience in Growing Environmental Goods and Services (EGS) Markets

Abstract

Keywords

Introduction

Background and Context of Paper

The Economic Conditions in Africa at Implementation of the AfCFTA

Characteristics of AfCFTA and Projected Benefits

Environmental Provisions under AfCFTA, Green Markets and Private Sector

Environmental Provisions under AfCFTA

Green Markets and Relevance to AfCFTA

Private Sector Opportunities

Theory of Relational and Transactional Governance Regimes

Information Costs

Bargaining Cost

Policing Costs

Trust and Trustworthiness

Application to the U.S. EGS Market

Information Sharing

Low Administrative Cost

Minimizing Dissonance in Policy and Practice

Legitimacy and Trust

Signaling of Government Priorities

Bargaining Cost

Policing Cost

Application to the AfCFTA Green Market

Information

Low Administration Cost

Minimizing Dissonance in Policy and Practice

Legitimacy and Trust

Signaling of Government Priorities

Bargaining Costs

Policing Costs

Challenges in Growing Green Markets in Africa

Define Effective Property Rights to Land and Forest Resources

Increase Intra-African Trade

Financing

Lack of Regulations for Green Technology and Role of Third Parties

Conclusion and Policy Implication

Footnotes

Declaration of Conflicting Interests

Funding

ORCID iD

Notes

Author Biography

References