Abstract
Currently, African countries are deepening and widening their regional trade agreements, aiming to establish a continent-wide free trade area by 2017. Using a comprehensive dataset of 148 countries for the period 1970–2010, I found robust evidence that African regional economic communities increase their members’ exports and imports, albeit with varying degrees. The results reveal that African trade blocs increase members’ exports by up to 175% and imports by as much as 200%. This paper documents a greater effect on exports and imports of those regional trade blocs with deeper integration.
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CENSAD Community of Sahel-Saharan States, COMESA Common Market for Eastern and Southern Africa, EAC East African Community, ECCAS Economic Community of Central African States, ECOWAS Economic Community of West African States, SADC South African Development Community.
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Notes
In 2012 the World Bank dataset showed that out of 47 Sub-Saharan African countries, 11 had populations of less than two million. In the same year, 18 countries had a gross domestic product (GDP) of less than US$5 billion, of which four had a GDP of less than 1 billion USD. Out of the total 47 Sub-Saharan African (SSA) countries, 15 are also landlocked, which markedly increases trade transaction costs, for obvious reasons.
This article concerns the effects of African regional economic communities (RECs) rather than Africa’s free trade areas (FTAs) on its exports, because an REC generally includes FTAs and also other forms of economic integration, such as economic unions, custom unions.
Regional trade blocs are crucial elsewhere in promoting export and fostering economic growth and prosperity. For example, some studies indicate that had the European Union (EU) not integrated five decades ago, the average per capita income of each country would have been one-fifth lower than it is today (Baldwin 1994; Sarker and Jayasinghe 2007). This suggests that deepening and widening regional integration in Africa could significantly spur the exports and economic growth of member countries.
It has been argued that African integration initiatives have been driven more by political motives than a true desire to foster trade and economic growth. Consequently, Africa is not benefiting from internal trade, as are similarly developing Asian and Latin American countries.
Africa has a heterogeneous group of countries that are in different economic development stages. The countries include failed states, coastal and landlocked resource-scarce countries, resource-rich countries and countries with less favourable agricultural potentials (McKay and Thorbecke 2015). A sustainable and substantial increase in real per capita GDP growth rates and improvements in social conditions are needed to address the economic misfortune of SSA.
According to Moyo (2009), the only way to break the poverty trap in Africa is by ending state aid and introducing market-based financial tools, such as government bonds and microfinance, and foreign direct investment and trade.
The biggest export destination of SSA is the EU, as it is the destination for approximately 24% of the total SSA export. Region-wise, SSA exports roughly 41% of its export commodities to advanced economies. Developing Asia is the destination of roughly 27% of the region total commodity export. Resources (including oil, ore, base metals and gold) account for three-quarters of total exports from SSA.
Intra-African trade and investment can fuel competitiveness and growth in the region by creating strong backward and forward linkages within the economy. African countries import agricultural products from global markets instead of from each other. African farmers provide only 5% of Africa’s cereal imports (World Bank 2012), revealing the huge untapped potential for growth of African agriculture through trade.
The term ‘spaghetti bowl’ was initially used by Bhagwati (1995).
Cognisant of the importance of trade for development, the USA, EU, China, India and other countries encourage developing countries to open their markets to SSA countries through preferential trade agreements (PTAs). The Generalised System of Preferences (GSP) and ACP are PTA agreements offered to least developed countries (LDCs). SSA poor countries also benefit from the Everything But Arms programme of the EU and African Growth and Opportunity Act of US PTA Schemes. More recently, the duty-free, quota-free arrangement with emerging Asian countries has been made available to SSA countries. Moreover, regional trade arrangements (RTAs) are also receiving more focus in SSA now.
Advanced countries and emerging economies are providing duty-free market access for African producers in the hope that trade will spur economic growth in the region. Regional integration is also receiving more attention in the region, although sometimes the motive is more political than economic. However, detailed analysis of PTAs and their effects on SSA economies are also missing, although there are many PTAs in the region. It is therefore pertinent to study trade in SSA in detail. For the benefit of informed policy making, some critical studies are missing.
Agricultural export for some countries accounts for as much as 50% of their total exports. For non-agricultural exports, raw materials such as oil, metal and minerals are dominant.
A number of studies reveal the importance of RTAs on member countries’ exports (Baldwin 1994; Sarker and Jayasinghe 2007; Tang 2005). Sound trade agreements have the potential to bring substantial economic gains to Africa, enabling the continent to export more diversified and more processed agricultural and industrial exports within the region and the rest of the world. A number of studies investigate SSA’s RECs’ effect on members’ exports. Some studies found that the COMESA, ECCAS and ECOWAS trade agreements in Africa do not have any considerable trade diversion and creation effects because of the lack of trade complementarity between member countries (Carrère 2004; Mayda and Steinberg 2009; Musila 2005; Rojid 2006).
The possibility of simultaneity bias is argued to be insignificant. The growth literature reveals that GDP is theoretically endogenous to bilateral trade flows. However, some definite explanations exist for generally disregarding potential endogeneity of GDP and exports. First, GDP is a function of net multilateral exports, which on average tend to be less than 5% of a country’s GDP and its connection to gross exports is much less direct. Second, the gravity equation relates bilateral trade flows to countries’ GDPs, which are a very small share of country’s multilateral exports. Third, previous studies indicate that the potential endogeneity of GDP with export is insignificant (Baier and Bergstrand 2007).
The best method to remove measurement error bias is creation of a continuous variable that would more precisely measure the extent of trade liberalisation from various trade agreements. If the trade agreements only remove the bilateral tariff, one could quantify them using the change in tariff rates. However, in practice, trade agreements go beyond tariff reduction, as they may develop into internal regulations and other non-tariff barriers (NTBs). The calculation of such measures is beyond the scope of this article and would be a useful direction for future research to take. This research adheres to the 0–1 measures that have been used over the last four decades (Baier and Bergstrand 2007).
The log linear specification excludes zero trade flows as the log of zero is undefined.
Normally, if the member countries of any two RTAs differ significantly, the overlapping membership is not a major problem, since there is still some variation. However, if the members of two RTAs do not differ much, there is a potential problem with the standard error of the estimates.
The \(R^2\) of the first-differenced equation is very small. But this might not be surprising given it is a regression on residuals. Additionally, very low \(R^2\) is observed in prominent studies (i.e., Baier and Bergstrand 2007) for such models.
As these studies do not take time-varying effects into account, this research did not consider the magnitude of the results to be useful.
The trade-to-GDP ratio is on average about 67%, going as high as more than 150% in the case of Lesotho.
It is good to note here that other regions of the world benefit from deeper regional integration. For example, the EU’s GDP per capita would be approximately one-fifth lower today, had no integration taken place since 1950 (Badinger 2005).
For example, about 73% of exports in the EAC came from Kenya, while in ECCAS about 64% of exports came from Cameroon. Similarly, in ECOWAS, about 77% of exports came from Nigeria (45%) and Côte d’Ivoire (32%), while in SADC more than 60% of exports originated from South Africa. The same applies to COMESA, since roughly 67% of exports are from Kenya (27%), Egypt (18%) and 10% from Uganda and Zambia (IMF DOT database).
For example, in the EAC REC, 67% of imports were destined for Uganda (40%) and Tanzania (27%), while in ECCAS, 52% of imports were destined for Gabon (29%) and Chad (24%). Similarly, in ECOWAS, about 58% of imports were destined for Côte d’Ivoire (23%), Ghana (23%) and Nigeria (12%). In SADC, roughly 66% of imports were destined for South Africa (21%), Zambia (18%), Zimbabwe (17%) and Mozambique (11%). Likewise, in COMESA, about 47% of imports are destined for Sudan (13%), the Democratic Republic of Congo (12%), Uganda (12 %) and Egypt (11%) (IMF DOT database).
Governments in Africa heavily rely on tax revenue generated from international trade because they have difficulty raising taxes from other sources since their tax base is narrow. For example, taking the average value for 1995–2005, SSA countries such as Lesotho and Swaziland generate a tax revenue as high as 50% from international trade, while the regional average is 30%. This is high compared with the Organisation for Economic Co-operation and Development average, which is 0.8%. As a result, they are reluctant to reduce their import tariffs to integrate with the rest of the world. Moreover, the WB data reveal that in 2010, taxes on international trade as a percentage of revenue were about 15% for Sub-Saharan Africa, and less than 5% for most regions, as well as the world average.
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I am grateful to Cong Pham, Debdulal Mallick, the editor as well as the anonymous referees for their valuable comments and suggestions. I would also like to thank seminar participants at the Department of Economics of Deakin University for their useful comments and insights on the preliminary version of the paper. The usual disclaimers apply.
Appendices
Appendix
A1. 46 African plus 102 non-African exporting countries
List of African countries
Algeria, Angola, Benin, Botswana, Burkina Faso, Burundi, Cabo Verde, Cameroon, Central African Republic, Chad, Comoros, Congo, Côte d’Ivoire, Djibouti, Egypt, Ethiopia, Gabon, Gambia, Ghana, Guinea, Guinea-Bissau, Kenya, Lesotho, Liberia, Madagascar, Malawi, Mali, Mauritania, Mauritius, Morocco, Mozambique, Namibia, Niger, Nigeria, Rwanda, Senegal, Seychelles, Sierra Leone, South Africa, Sudan, Swaziland, Togo, Tunisia, Uganda, Tanzania, Zambia, Zimbabwe.
List of countries outside Africa
Afghanistan, Albania, Argentina, Armenia, Australia, Austria, Azerbaijan, Bahrain, Bangladesh, Barbados, Belarus, Belgium, Belize, Bhutan, Bolivia, Brazil, Bulgaria, Cambodia, Canada, Chile, China, Colombia, Costa Rica, Croatia, Cuba, Cyprus, Czech Republic, Denmark, Dominican Republic, Ecuador, El Salvador, Estonia, Fiji, Finland, France, Germany, Greece, Guatemala, Haiti, Honduras, Hungary, Iceland, India, Indonesia, Iran, Iraq, Ireland, Israel, Italy, Jamaica, Japan, Jordan, Kazakhstan, Kuwait, Latvia, Lebanon, Libya, Lithuania, Luxembourg, Malaysia, Maldives, Malta, Mexico, Mongolia, Nepal, Netherlands, New Zealand, Norway, Oman, Pakistan, Panama, Papua New Guinea, Paraguay, Peru, Philippines, Poland, Portugal, Qatar, Republic of Korea, Moldova, Romania, Russia, Saudi Arabia, Singapore, Slovakia, Slovenia, Spain, Sri Lanka, Sweden, Switzerland, Syrian Arab Republic, Thailand, Turkey, Ukraine, United Arab Emirates, the UK, the USA, Uruguay, Venezuela, Vietnam, Yemen.
A2. Additional explanatory tables
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Admassu, S. An empirical analysis of the trade-creation effect of African regional economic communities. Empir Econ 56, 843–863 (2019). https://doi.org/10.1007/s00181-017-1382-7
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DOI: https://doi.org/10.1007/s00181-017-1382-7