REGIONAL INTEGRATION MODELS AND AFRICA’S GROWTH IN THE 21 ST CENTURY: A FITNESS EVALUATION Peter D. GOLIT and Yusuf ADAMU* Presented at the African Economic Conference (AEC); October 28–30, 2013 Johannesburg, South Africa. _______________________________________________________________________ ______ Golit (Senior Economist) and Adamu (Assistant Economist) are staff of the Research Department, Central Bank of Nigeria (CBN). The views expressed in this paper are those of the authors and do not necessarily reflect the opinions of the CBN.
Transcript
REGIONAL INTEGRATION MODELS AND AFRICA’S GROWTH IN THE 21ST CENTURY: A FITNESS EVALUATION
Peter D. GOLIT and Yusuf ADAMU*
Presented at the African Economic Conference (AEC); October 28–30, 2013
Johannesburg, South Africa.
_____________________________________________________________________________Golit (Senior Economist) and Adamu (Assistant Economist) are staff of the Research Department, Central Bank of Nigeria (CBN). The views expressed in this paper are those of the authors and do
not necessarily reflect the opinions of the CBN.
Outline1.0 Introduction
2.0 Related Literature
3.0 Rationale for Africa’s Regional Integration
4.0 Africa’s Regional Integration Models
5.0 Methodology Data Sources/Variable Definitions Estimation Technique
6.0 Analysis of Empirical Results
7.0 Conclusion/Policy Recommendations
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1. Introduction……1/2
Over the years, Africa has made concrete efforts to propel growth Advancements in intra-regional cooperation Gradual Integration into the global economy.
Policy makers/opinion leaders believe in capacity of regional integration (RI) to promote economic growth.
But without consensus on the particular form integration should take to optimize the continent’s growth.
Proposed integration schemes appear to ignore countries’ peculiarities, thus, jeopardizing their effective implementation.
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Introduction……2/2
Other Issues: Structure of the Integration Schemes Differences in Objectives/Approach of rival integration agencies Overlapping memberships
The Lagos Plan of Action strongly criticized in favor of more outward-oriented strategies.
Changes in socio-political/policy environment refocused the minds of development thinkers/academics away from traditional approaches.
Objective of paper: to explore the proposed RI models and
empirically determine the right blend that is most suited for the continent’s growth in the 21st Century.
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2. Related Literature……..1/35
Africa needed RI to: Keep pace with rest of the world towards her full integration into the world
economy Better exploit the opportunities in the global markets.
Africa could not leave its future to chance or some special interests, or a few potentates lacking in vision or warlords with transient alliances (Ouattara,1998)
Regional cooperation planned to: Elicit interest of individual countries in policies of regional partners, ensuring
mutual commitment and attainment of convergence standards. Ensure coordination of national policies to enable African countries pool together
small economies into larger markets for economies of scale Enhance trade links among African countries/strengthen their ability to
participate in trade on a global scale
Considerable efforts in trade openness, but no substantial evidence that regional initiatives delivered on ultimate goal of sustaining growth and development.
Related Literature……..2/36
Several studies investigated the interactions between RI and economic growth, but literature remains widely divided on nature of relationships
Yang and Gupta (2005): Africa’s Regional Trade Agreements (RTAs) not effective in fostering trade and
Foreign Direct Investment (FDI) External trade barriers comparatively high Low complementarity of member country resources constrain both intra and extra-
regional trade Small market sizes, inefficient transport systems and high transactions costs
frustrating African countries from reaping the potential benefits of RTAs.
Vamvakidis (1998): Countries with large, open and relatively developed neighboring economies growing
faster than those bordering small, closed and less developed neighbors. Small economies growing faster when involved in regional trade agreements with
larger and more developed economies. No regional trade initiatives with preponderance of small, closed and less developed
countries in RTAs found to facilitate economic growth
Related Literature……..3/37
Fernandez (1997), Frankel and Rose (2002), Dion (2004), Hartono, et al. (2007), Ezaki and Nguyen (2008); and Naveh, Torosyan and Jalaee (2012) all found positive roles for RI in relation to the Gross Domestic Product (GDP)
3. Rationale For Africa’s Regional Integration …..1/1
Africa remains the most deprived continent in the world with fragmented component parts, tiny domestic markets and declining shares of world trade.
Combined GDP of 19 Sub-Saharan African (SSA) countries less than US$5 billion below US$281.8 billion recorded by the smallest EU country (Republic of Ireland) in 2008.
RI, thus, most appropriate means of linking individual countries to create larger markets for better competition, allocation efficiency and economies of scale.
Decades after implementing RTAs, Africa is yet to : Meaningfully expand intra-regional trade or increase overall GDP to levels
comparable with other regions. Fully integrate: Deviations in individual country policies against the common goals
of the regional blocs. In virtually all cases, the volume of intra-regional trade has stagnated or even
declined with no changes in trade composition, suggesting that RI could not significantly alter the structure of the economies (Fine and Yeo, 1997, P. 433).
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4. Africa’s Regional Integration Models…..1/4
THE TRADITIONAL APPROACH focused on: Increasing intra-regional trade and industrialization to spur growth (import-
substitution strategy) in integrated regions. Member countries producing and exporting to one another, replacing non-member
countries’ exports with those of member countries.
Such protective mechanisms: Pre-supposes a unidirectional hypothesis that intra-regional trade promotes
economic growth, and that the magnitude of impact is high. Have to give way to more proactive and outward-oriented strategies that offer
learning opportunities against global competitive pressures for quicker access to the global markets.
In any case, Africa’s intra-regional trade is low, a tail too small to wag the much bigger body (Africa’s overall economic growth) – Oyejide (2000).
THE ALTERNATIVE APPROACHES Proceed from knowledge of prevailing conditions in member countries and need
for individual countries to first engage in some self-cleansing by refocusing domestic reforms to growth fundamentals, key of which include macroeconomic stability, transactions costs, physical infrastructure, and human and physical capital accumulation.
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AFRICA’S REGIONAL INTEGRATION MODELS…..2/4
Human and Physical Capital Accumulation Modern growth models identified human and physical capital accumulation
as key in the growth process of developing countries. Low levels of domestic and foreign direct investments in African countries. Rapid transformation of Asian Tigers linked to their ability to accumulate
vast human and physical capital. Africa’s new regional integration models should necessarily emphasis these
key growth drivers if they must deliver growth to the African continent.
Macroeconomic Stability Rather than dissipating energies on stimulating trade, Africa needs to
enthrone a sound and stable macroeconomic environment for speedy factor accumulation and efficient use of scarce production resources, including human and physical capital.
The above argument is based on the premise that sustainable macroeconomic stability is a double-edged sword that on one hand sharpens domestic investments and on the other hand induces huge foreign direct investment.
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AFRICA’S REGIONAL INTEGRATION MODELS…..3/4
Transaction cost Africa’s unimpressive growth performance is due to High
transactions costs : Transport difficulties in many landlocked African countries Highly inefficient and uncompetitive telecommunication networks Poor judicial systems that frustrates contract enforcements, information asymmetries, and poor ancillary services
For Africa to witness any reasonable growth, it needs to: Develop schemes that are capable of bringing transactions costs to
international levels Enhance its competitive status, and Attract huge capital inflows for investment in labor-intensive industries.
RTAs that address these underlying problems, in addition to facilitating shared standards and common investment policies to hasten cross-border investments are, thus, considered more fitting for Africa’s growth in 21st century
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AFRICA’S REGIONAL INTEGRATION MODELS…..4/4
Infrastructural Services The availability, efficiency and cost of key infrastructural services like power,
telecommunication and transport determine the speed of integration of African countries into the fast evolving global markets
facilitates access to useful information by economic agents, thus, enhancing competition
externalities and spillovers that would emerge from linking Africa through regional infrastructures like commodity exchange, stock market and clearing house facilities are capable of assisting the less resource-endowed African countries in escaping from their present pathetic development levels.
Other Alternative Models Involve linking a group of African countries with a given industrialized country
under a free trade agreement The ongoing trade agreements between China and various African countries
constitute a good example. Encompasses multilateral agreements among individual African countries within a
framework that provides for both intra-African linkages and sufficient linkage with the rest of the world under the platform provided by the World Trade Organization (WTO).
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5. Methodology………..1/4
Uses annual data spanning 1980-2012
Employs the Johansen (1998) and Johansen and Juselius (1990) method of co-integration and Vector Error Correction Mechanism (VECM) to:
Test for the presence of long-run equilibrium relationships among the variables Estimate the static and dynamic coefficients.
• Uses the maximum likelihood (ML) procedure to: Test for the number of co-integrating vectors, which allows inference on
parameter restrictions, operating within the vector autoregressive (VAR) framework.
•VECM is employed to examine the short-run dynamics, if the variables of interest are co-integrated.
•VECM also allows testing for co-integration in the whole system of equation in one step without requiring normalization on a particular variable.
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Methodology………….2/4
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Methodology………….3/4
• GCF = Gross Fixed Capital Formation reflects accretion to stock of fixed assets; in this case the additions to the stock of inventories. This variable proxied the level of physical accumulation and thus useful in modern
growth models that advocate for the accumulation of vast human and physical capital.
• (GGE) = General Governments’ Expenditure which stands for spending of general governments on key infrastructure services like communications and transport, excluding power. It is, thus, expected to boost the level of economic activities within the continent.
But, beyond a certain level, excessive spending may create distortions that are counter-productive.
• ELTR = Consumption of Electricity which together with spending on other infrastructure capture the response of growth to changes in government’s infrastructure spending
•
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Methodology………….4/4
6. Analysis of Empirical Results….1/4
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Table 1. Unit Root Tests ADF PP
Variable Level First diff. Inference Level First diff. Inference
Notes: The acronymns LR, FPE, AIC, SIC and HQ connotes sequential modified LR test statistic (each test at 5% level), Final prediction error, Akaike information criterion, Schwarz information criterion and Hannan-Quinn information criterion, respectively. The asterisk * indicates lag order selected by the criterion.
Analysis of Empirical Results….3/419
Table 4 Unrestricted Cointegration Rank TestTrace
H0 H1 EigenvalueTrace
Statistic 0.05 Critical Value Prob.**r = 0 r = 1 0.851291 177.9714 125.6154 0.0000r < 1 r = 2 0.775993 118.8927 95.75366 0.0005r < 2 r = 3 0.639215 72.51434 69.81889 0.0300r < 3 r = 4 0.448551 40.91064 47.85613 0.1915r < 4 r = 5 0.388642 22.45926 29.79707 0.2737r < 5 r = 6 0.199252 7.204985 15.49471 0.5540r < 6 r = 7 0.010158 0.316502 3.841466 0.5737
Maximum Eigenvalue
H0 H1 EigenvalueMax-Eigen Statistic 0.05 Critical Value Prob.**
r = 0 r > 1 0.851291 59.07870 46.23142 0.0013r < 1 r > 2 0.775993 46.37838 40.07757 0.0086r < 2 r > 3 0.639215 31.60371 33.87687 0.0912r < 3 r > 4 0.448551 18.45138 27.58434 0.4580r < 4 r > 5 0.388642 15.25427 21.13162 0.2715r < 5 r > 6 0.199252 6.888483 14.26460 0.5024r < 6 r > 7 0.010158 0.316502 3.841466 0.5737Notes: a linear time trend was included in the specification to compute the cointegration statistic; exogenous variables included were to capture seasonality in the data, significant developments at the international oil market and a dummy to capture the shift in the monetary policy rate series during the period 1985Q1-2011Q4. The asterisk * denotes rejection of the hypothesis at the 0.005 level.
2.20) Notes: values in parenthesis are the t-statistics of the parameter estimates.
7. Conclusion/Policy Recommendations..1/2
•The study found a significant positive role for infrastructure financing, and human and physical capital accumulation both of which significantly influenced Africa’s economic growth
•Intra-African trade, though positive and significant, was found to be less effective in inspiring growth compared to the above growth fundamentals.
•Trade openness and government spending were the only variables discovered to significantly influence Africa’s economic growth in the short-run
•Though intra-regional trade was found to impact growth, empirical evidence suggests that the long run impact is incomparable to the substantial effect realizable from growth fundamentals- infrastructure spending and gross capital formation.
•The study concludes that the traditional approach to regional integration may not provide the best alternative for Africa’s economic growth
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Conclusion/Policy Recommendations….2/2
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• The findings have serious policy implications for the growth of African countries. Policy makers need to understand that regional integration dominated by trade plays less crucial role in spurring economic growth.
• Another important finding that may attract the attention of policy makers is the discovery that infrastructure financing impacts more on Africa’s growth than trade with the outside world.
• African countries can, therefore. inspire growth by concentrating more on domestic efforts rather than relying on foreign countries.
• African countries can substantially improve growth if they can muster the political will to refocus RTAs to growth fundamentals like infrastructure development, and the accumulation of human/physical capital.
• The traditional view that African countries should concentrate on trade among themselves is no longer tenable.
• We, therefore, recommend the adoption of mixed policy approach to RI to foster Africa’s economic growth in the 21st century.
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