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TRADE LIBERALIZATION, EXPORT PERFORMANCE AND ECONOMIC GROWTH IN ECOWAS

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CHAPTER ONE INTRODUCTION

1.1       Background to the study

There is scarcely any nation that can develop and grow in isolation. From colonial times to the present, nations and regions of the world have continued to collaborate with each other in the areas of trade, investments, science, technology, agriculture, health, education among others. They have formed and entered into various economic co-operations, collaborations, partnerships, joint venture agreements, which have remained catalysts for economic growth and freedom (Akpan and Effiong, 2012). These co-operations and agreements are results of deliberate policies of various governments to allow free flow of trade (in goods and services) across their national borders.

According to the World Trade Report (2013), world merchandise trade and trade in commercial services were worth in 2011 about USD 18 trillion and USD 4 trillion, respectively, despite global economic adversities, natural disasters, and political upheavals around the world. In the last three decades, world trade has grown dramatically and much faster than global output (Rueben and Arene, 2013). Between 1980 and 2012, world merchandise trade has increased by more than 7% and trade in commercial services, by about 8% per year (WTR, 2013). With such unprecedented growth in global trade, It is becoming increasingly obvious that strength lies in international co-operation amongst countries, particularly those within the same geographical regions, and that the world is experiencing the second age of globalization after the long and deep fall in the global economy that occurred between 1914 and 1945 due to two world wars and the Great Depression.

The dynamics of international economic relations and the complementary nature of development activities at the international level, coupled with scarce resources on a worldwide scale, forced a large number of developing countries to look for ways of participating more effectively in the world economy (Brautigam and Knack, 2004). One way was to set up economic and monetary free-trade areas. The aim of these regional economic grouping among others is to promote cooperation and integration, leading to the establishment of an economic union in order to raise the living standards of the people in the sub-region while maintaining and enhancing economic stability and fostering relations among member states so as to achieve a meaningful human centered development in the sub-region in particular and the continent as a whole (Busari, 2006).

Consequently, the formation and success of the European Economic community in the 1950s spurred developing countries in Africa, Asia and Latin America to establish regional co-operation arrangements of their own, and the first United Nations Conference on Trade and Development

(UNCTAD) saw the promotion of economic co-operation among developing countries as a means to expanding their intra-regional and extra-regional trade and encouraging industrial and Agricultural diversification (Yusuf, Malarvizhi, and Khin, 2013). These activities culminated to the establishment of the Economic Community of West African States (ECOWAS) on 28th May, 1975. ECOWAS is a product of the go-between two distinct political lining that brought about the continental political organization in place. Their fundamental objectives which appears to be perfect the way they are conceived, is such that, the end result of these conceptions, when fully realized will bring not only socio-economic development, but also translate the entire west African community into a ‘near perfect’ community; where lives and properties will not only be safe and secured, but have a guarantee for realizing the full potentialities of life in a safe environment, where poverty will no longer have a place to hibernate and a community that tends to develop its own technological needs from within (Sakyi, 2011). Prior to trade liberalization among ECOWAS, exports within the region was distorted by export taxes, overvalued currencies, export licensing, existence of monopoly marketing boards and high import duties. As Chaudhry (2010) observed, trade liberalization could be said to have moved rapidly in many ECOWAS member countries in the 1990s through the adoption of a combination of unilateral and regional modalities.

Different authors have attempted to define trade liberalization. According to Ogunkola and Babatunde (2008) Trade liberalization can be characterized as the shifting of control over imports and foreign exchange towards tariff based protection. The shift in the mode of control can occur in various stages. It can progress through the rationalization of the tariff structure, reduction of tariff dispersion, and reduction/elimination of tariff rates. Orji (2014) defined trade liberalization as the removal or reduction of restrictions or barriers on the free exchange of goods between nations. This includes the removal or reduction of both tariff (duties) and non-tariff obstacles (licensing rules, quotas). The easing or eradication of these restrictions is often referred to as promoting tree trade (Klasra, 2011). Trade liberalization is therefore expected to reduce the anti-export bias and make export more competitive in the international market through the reduction/elimination of tariff barriers, non-tariff barriers, export duties and exchange rate distortions (Arodoye and Iyoha, 2014). The process of economic development is as a process of structural transformation where countries move from producing “poor-country goods” to “rich-country goods,” a precondition for this transformation is often the existence of an elastic demand for countries’ exports in world markets so that countries are able to leverage global export markets without fearing negative terms of trade effects (Narayan, 2005).

In many developing countries, there is often very low domestic demand so exports remain one of the few channels that in the longer run significantly contribute to higher income per capita growth rates of a country. That notwithstanding, the competitiveness and ensuing improvement of a country’s exports as a result of exposure to global competition, suggests that export remains the hallmark of economic growth. To record improvements in country’s export performance, countries’ exports need to be globally competitive to take advantage of leveraging world markets. Import restrictions of any kind, create an anti-export bias by raising the price of importable goods relative to exportable goods (Pernia and Quising, 2003). The removal of this bias through trade liberalization will encourage a shift of resources from the production of import substitutes to the production of export oriented goods. This in turn will generate growth in the short to medium term as the country adjusts to a new allocation of resources more in keeping with its comparative advantage (McCulloch, Winters and Cirera, 2001).

Trade liberalization does not necessarily imply faster export growth, but in practice the two appear to be highly correlated. The impact of trade liberalization on economic growth outlined above probably works mainly through improving efficiency and stimulating exports which have powerful effects on both supply and demand within an economy (Oladipo, 2011). There are several measures of trade liberalization or trade orientation, and most studies seem to show a positive effect of liberalization on export performance. Likewise there are different studies of the relation between exports and growth and the evidence seems overwhelming that the two are highly correlated in a causal sense, but the relative importance of the precise mechanisms by which export growth impacts on economic growth are not always easy to discern or quantify (Yanikkaya, 2003).

The high performance Asian countries are perhaps the most spectacular examples of economic success linked to exports (notwithstanding the recent crisis in East Asia). The economies of Japan, South Korea, Taiwan, Singapore, Hong Kong, Malaysia, Indonesia and Thailand have recorded some of the highest GDP growth rates in the world – averaging approximately 6 percent per annum since 1965 – and also some of the highest rates of export growth, averaging more than 10 percent per annum (Santos-Paulino and Thirlwall, 2004). It should be noted, however, that this success has not always been based on free trade and laissez-faire. Japan and South Korea, for example, have been very interventionist, pursuing relentless export promotion but also import substitution at the same time (Jin, 2006).

ECOWAS trade liberalization scheme has been marked by the unwillingness of many countries to implement its provisions relating to elimination of tariff and non-tariff barriers to trade and the functioning of a compensation mechanism (Arodoye and Iyoha, 2014). This is reflected by: difficulties in standardizing and harmonizing customs documents and tariff schedules; failure to extend total exemption from duties and taxes for unprocessed goods and traditional handicraft products; failure to apply preferential tariffs to approved industrial products; continued existence of non-tariff barriers, especially in the case of food and textiles; absence of certificates of origin for unprocessed goods and for industrial goods, and failure to produce both the certificates of origin and the export declaration; rigid border formalities and customs officials’ intransigence among others (Awokuse, 2008).

As a result, countries within the ECOWAS sub-region also adopted the structural adjustment programme (SAP) aimed at liberalizing their economy including the external sector. These new development options which marked the region’s total departure from the import substitution strategies, sought to redirect growth strategies towards the external market (Amponsah, 2004). Among the countries in the ECOWAS sub-region that adopted this strategy in the early period include Gambia, Ghana, Guinea and Mali. Consequently, foreign trade was liberalized through the reduction of tariffs and non-tariffs barriers as well as the reduction of import duties applied to imports in the ECOWAS sub-region (Chuku, 2014). Currencies were also devalued to encourage exporters with the aim of boosting exports and growth and fostering the integration of the countries into the global economy. As Amponsah (2002) noted, with fiscal and monetary discipline, appropriate financial sector reforms and the decontrol of domestic prices are expected to raise international competitiveness. In the same dimension, regional liberalization schemes within the ECOWAS was established as a result of the small size of the typical African economy and the perceived disadvantages associated with smallness (Oyejide, 2010). The basic objective of such liberalization scheme is to significantly increase trade within each integrated area and as well expand the areas overall trade. To this effect, recently, after a seven-year delay, ECOWAS finance ministers agreed in 2013 to launch a Common External Tariff, with five tariff bands (UNCTAD, 2014). The common tariff aims to discourage the high-level of smuggling and wide price differentials on products across the region. An ECOWAS Monetary Union and central bank are expected to be launched in 2020 (AfDB, 2013), bringing together the six countries of West African Monetary Zone (WAMZ) and the eight countries of the West African Economic and Monetary Union (WAEMU).

However, while the general consensus is on the need to design and implement reforms, it is still not certain if the growth of the ECOWAS sub-region would be enhanced through the adoption of programs that encourage more open economic policies. This is because despite significant trade liberalization and membership of regional trade arrangements over the past two decades, trade flows within the sub-region are distinguished by the shrinking share of the sub-region trade in the share of world trade, high dependence of exports on primary commodities and high dependence of the countries within the region on their European trade partners (Rueben and Arene, 2013).

1.2        Statement of the Problem

In spite of the aforementioned positive impact of regional trade liberalization and the evidences that abound in relation to the benefits many countries across the globe have gained from regional integration, African countries seem to not have derived much and have overall been left behind. The major concern is the fact that Africa trades very little with itself. According to United Nations Economic Commission for Africa (UNECA) (UNECA 2010), between 2000 and 2009 Africa sourced a stable 9% of its total imports from African countries, while 8% of its exports were sold to African countries. International trade statistics indicate that African countries share in world trade has declined from around 6 % 25 years ago to about 2%; less than 1%, if South Africa is excluded (UNECA, 2008). This trend points to the continent’s increased marginalization in the context of world trade. While intra-African trade has grown, there has been little increase of its share in Africa’s total trade; rising only by 1 percentage point from 9.7% in 2000 to 10.8% in 2010 (Chuku, 2014). In contrast, in other parts of the world intra-regional trade is a much larger share of total trade for the region.

For West Africa, trade pattern is outwardly oriented towards the developed countries of the North. The poor trade performance of the region is revealed in table 1 of the appendix. Exports are overwhelmingly raw produce, while the region depends on imports for most of its needs, including food from the same source. West Africa‘s trade and aid dependence on the traditional Northern development partners have remained virtually the same since the flush of independence more than five decades ago (Sesay and Omotosho, 2011). Presently, the United Nation (UN) classifies 73% of West African states as Least Developed Countries (LDCs). ECOWAS accounts for 35% of the African LDCs-making West Africa the foremost LDC region in Africa and, indeed the world as a whole (Reuben, 2013). In addition, several studies have suggested that the small size of Western African economies renders them ineffective in determining the direction of foreign trade (Ezekwesili, 2011).

Supposedly, ECOWAS member nations engaged in little trade among themselves. Even amidst policies, programmes and development projects such as the intra-community road construction and telecommunication; agriculture, energy and water resources management, carried out by the commission in member states through ECOWAS Bank for Investment and Development (EBID), not much improvement has been recorded in the past decade (Odularu, 2008). For instance, with the implementation of the ECOWAS trade liberalization scheme, which aimed at boosting intra-regional trade, evidence showed that intra-ECOWAS trade, as a percentage of total ECOWAS trade, was highly insignificant (Onogwu, Arene, and Chidebulu 2011). Between 1999 and 2006, the total intraECOWAS trade was 12% of the total ECOWAS trade (intra and inter-ECOWAS trade) compared to the European intra-regional trade which is about 60% of total trade. While ECOWAS total external trade was 45.7% of the regional GDP over the period 1999 to 2006, the intra-ECOWAS trade was a mere 5.5% of the regional GDP over the same period (ECOWAS Statistical Bulletin, 2008). This means that trade among member countries is still highly negligible, and without sufficient intra-regional trade, economic growth of the region will continue declining.

Worthy of note, is the issue of high tariff imposition, exemplified by extortion at the border by the personnel of the agencies concerned. This is already an established stumbling block to achieving the desired ends of abolishing the trade obstacles from within the international trading relationship within ECOWAS community. More so, the unprofessional ethics, corrupt attitude of most of the personnel; customs, the immigration, the coastal guards, and other personnel that are manning the border-post that link all the ECOWAS community, continue to constitute a problem to effective trade integration of the West African Community period (ECOWAS Statistical Bulletin, 2008). It induces apathy to businessmen and traders alike. Business men and traders that transact business on the Lagos–Cotonou–Lome–Accra–Abidjan axis, for example, complain bitterly on the high rate of extortion and intimidations at these routes (Sesay and Omotosho, 2011).

In addition to high-tariff imposition, ECOWAS region is also characterized with poor performance in export of dynamic products; they remained commodity dependent in its exports, leading to transfer of economic gains across border. Over 90% of the region’s export is primary products with very little value-added which accentuated from commodity price and demand inelasticity resulting in terms of trade losses and volatile foreign earnings (Lloyd, Ogundipe and Ojeaga 2014).

Figure 1:         Export Share by Region for ECOWAS

 

Source: UN COMTRADE Data, 2010

Figure 1 shows export shares by destination for ECOWAS with data availability in the United Nations Commodity Trade Statistics (UN COMTRADE) database between 2004 and 2013.

Calculations are made over the average for all years with available data in order to get a consolidated trend and reduce the impact of short term fluctuations. Data for 2014 is not yet available for most countries, and 2009 was excluded as an outlier given the impact of the global economic crisis on trade during that year. In this breakdown, only Nigeria and Guinea have single digit shares of exports to ECOWAS. For other countries in the region, this ratio can be as high as 59 per cent (Togo), 55 per cent (Burkina Faso), or 46 per cent (Senegal). Yet, ECOWAS as a region has not performed significantly in terms of foreign exchange earnings mainly because her exports are heavily dependent on a narrow base of few agricultural and mineral exports and which meant that it had to endure the consequences of all problems resulting from the fluctuation of commodity prices in world markets (Onogwu et al, 2011). About 17 of the 20 most important export items of ECOWAS are primary commodities and resource-based semi-manufactures (UN COMTRADE, 2010).

The exports of ECOWAS countries remain heavily dependent on foreign destinations, with 27.6 per cent for the United States, followed by the Euro zone with 23.1 per cent, and India, which does better than the whole community together, with 9.5 per cent. The profile is more or less the same for imports which originate first from the Euro zone with 25.3 per cent, China with 25.8 per cent, then a bit lower from the United States with 8.4 per cent (UN COMTRADE, 2010). This is in spite of economic policies previously implemented and those recently amended. Table 2 in the appendix shows principal trade partners of ECOWAS members by country.

Consequently, the assertion of a strong influence of trade liberalization and export performance on economic growth in developing countries has remained largely unresolved in the literature. The argument being whether trade liberalization has led to increase or decrease in economic growth and to positive or negative export performance. While some studies found a positive association between trade liberalization and economic growth (Svedberg, 2000, Yeats, 2002 Santos-Paulino, 2003, Kencall, 2009, Sayeeda, 2010), some other studies also found little empirical evidence to support a link between trade liberalization, export performance and economic growth (Shafaeddin, 1994; Greenaway and Sapsford, 2000; Jenkins, 2001; Dowrick, S. and J. Golley, Foster, 2008, Hye, 2011). However, only a few of these researchers considered the impact of two major growth indicators, in trade liberalization and export performance, on the economic growth of ECOWAS as a region.

There is a need to investigate regional integration via trade liberalization which is believed to increase the size of the local market; enhance competition and efficient production, due to economies of scale. All things being equal, then, it is much easier for the enlarged West African market to attract foreign investment that will benefit the region provided the investors do not engage in tariff-jumping. Also, this will make further, the need for a common currency which will foster trade liberalization justified. Hence, the main focus of this study is to investigate the impact of trade liberalization and export performance on the economic growth of ECOWAS and by extension show the level of

Africa’s integration into global trade. This study differs from previous ones in the sense that it utilizes panel data approach to analyze the generalized method of moment model and focusing on more recent data. In addition, the study estimates a single equation for thirteen selected countries among the ECOWAS member countries. This provides us with a better understanding of the impact of ECOWAS on the individual country.

This research evidence will also be useful to administrators in the west-African sub-region saddled with the responsibility of reviving and sustaining economic growth and development across Africa in general and the ECOWAS region in particular through trade reforms. The study will also serve as guide to policy designers and implementers on the extent to which trade liberalization is needful, and help them appreciate existing policies in that regard with the intent of readjusting where necessary. The work will also aid researchers as it contributes to existing knowledge on the subject and then suggest areas for further research.

In this regard, the study will therefore seek to answer the following research questions:

  1. i) To what extent has trade liberalization affected the economic growth of ECOWAS ii) To what extent has trade liberalization affected export performance in ECOWAS

1.3        Objectives of the Study

Generally, the study seeks to assess the impact of trade liberalization on economic growth in ECOWAS. Specifically, the study will seek:

        (i)        To evaluate the impact of trade liberalization on the economic growth of ECOWAS

 

(ii)        To ascertain the impact of trade liberalization on export performance in ECOWAS

 

1.4        Research Hypothesis

The hypotheses of the study are formally stated in their null form while the alternatives are implied.

H01: Trade liberalization has no impact on economic growth of ECOWAS

H02: Trade liberalization has no impact on export performance in ECOWAS

 

1.5       Scope of the Study

This study investigates trade liberalization, export performance and economic growth in ECOWAS. Specifically, we investigate the hypothesis that the trade liberalization experience of each member country of ECOWAS has not positively affected economic growth in each country and in ECOWAS as a region. Also of interest to this study is how exports in the region has performed in terms of its impact on economic growth in the region. The study relies on data from United Nations Conference on Trade and Development (UNCTAD) and World Development Index (WDI) of the World Bank covering a period of thirteen years (2000-2013). The study shall use dynamic panel growth models based on the GMM estimator developed by Arellano & Bond (1991) as the econometric tool to estimate the relationships between core variables. A sample of 13 heterogeneous countries from the same region will be used in the analysis. Given the complexity of constructing a trade openness index in the absence of adequate data, the study shall use the ratio of total trade (exports + imports) to real GDP, sourced from UNCTAD, as a proxy for trade liberalization. The study also employs the use of diversification index provided by the World Bank.

 

1.6        Significance of the Study

Small differences in economic growth, maintained for extended periods of time, can lead to dramatic differences in standards of living. These differences help account for the interest of policymakers and analysts in learning whether dynamic gains from trade liberalization exist, however small.

This research evidence would therefore be useful to administrators in the west – African sub-region saddled with the responsibility reviving and sustaining economic growth and development across Africa in general and the ECOWAS region in particular through trade reforms. The study will also serve as guide to policy designers and implementers on the extent to which trade liberalization and export diversification are needful, and help them appreciate existing policies in that regard with the intent of readjusting where necessary. This is particularly important as development economists, policy makers, and governments of the region have embarked on serious efforts in integrating their economies. The work will also aid researchers as it contributes to existing knowledge on the subject and then suggest areas for further research.

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