AN EMPIRICAL ANALYSIS OF THE RELATIONSHIP BETWEEN FOREIGN TRADE AND ECONOMIC GROWTH IN CENTRAL AFRICA

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1 AN EMPIRICAL ANALYSIS OF THE RELATIONSHIP BETWEEN FOREIGN TRADE AND ECONOMIC GROWTH IN CENTRAL AFRICA 1 HUSSAINA ABDULLAHI YARIMA, 2 SHUAIBU SIDI SAFIYANU 1,2 (b.sc & m.sc econs) Department Of General Studies, Nasarawa State Polytechnic, P.M.B. 109 lafia. 1 hussydahiru@gmail.com, 2 shuaibu_sidi@yahoo.com Abstract- This study investigated the relationship between foreign trade and economic growth in Central Africa over a period of The study utilized secondary sources of data obtained from World Bank and African Development Bank. Panel Regression Techniques was applied which incorporated both Fixed and Random Effects in analyzing the data set. The total of 8 countries that cut across the Central Africa region were selected. The study reports that exports has a positive significant influence on economic growth in Central Africa while import is negative and statistical significant. Foreign exchange rate did not significantly influenced economic growth during the period under study. On the basis of the finding, the study concludes that exports exert influence on Central Africa economic growth. The study therefore recommends that governments of Central African countries should boost export through establishments of relevant agency, is also recommended that manufacturing industries should improve so that their output would be competitive in international market and exchange rate deregulation should be guided in order to achieve stable and consistent exchange rate. Keywords- Foreign Trade, Economic Growth I. BACKGROUND TO THE STUDY Foreign trade means exchange of goods and services across international boarders. The working of an economy in terms of growth rate and per capita income has been on the domestic production, consumption activities and in conjunction with foreign transaction of goods and services. (Usman, 2011). Foreign trade has been regarded as an engine of economic growth (Adewuyi 2002). Since foreign trade has been regarded as an engine of growth, it is expected to lead to steady improvement in human status by expanding the range of people s standard and preference. Since no country has grown without trade, foreign trade plays a vital role in restructuring economic and social attributes of countries around the world, particularly, the less developed countries. Africa is basically an open economy with international transactions constituting a significant proportion of its aggregate output. To a large extent, Africa s economic development depends on the prospects of its export trade with other nations. Foreign trade provides both foreign exchange earnings and market stimulus for accelerated economic growth. (Adewuyi 2002). Many economists generally agreed that openness to international trade accelerated development. The more rapid growth may be a transition effect rather than a shift to a different steady state of growth rate. Clearly, the transition takes a couple of decades or more, so that it is reasonable to speak of trade openness accelerating growth rather than merely leading to a sudden one time adjustment in real income (Dollar and Kraay, 2001). Economic growth means an increase in the average rate of output produced per person usually measured on a per annum basis. The relationship between trade and growth is envisaged through an export-led growth strategy, following the theory that sustained trade as the main engine of economic growth. Many studies have sought to analyze export-growth nexus using ordinary least squares and cross section data to demonstrate the advantages of export promotion strategy in comparison with import substitution policy (Obadan and Okojie, nd). While there have been numerous studies on cross section analysis, studies on country specific analyses appear scanty. Surprisingly, more than half of the empirical studies published in the 1990s found no long run relationship between exports and economic growth. Rather, these studies suggest that growth arises only from a positive short term relationship between export expansion and growth of gross domestic product. Thus, the dismal performance in Africa s trade is closely reflected in developments in the growth of GDP. Africa s GDP growth averaged 0.8 percent over the period Growth in the fastest growing developing countries outside Africa averaged 5.8 percent, while that for the rest of the developing world was 1.8 percent (Sachs and Warner, 1997). It is against this background that, this study seeks to examine the relationship between foreign trade and economic growth in Central Africa. II. LITERATURE REVIEW 2.1 Conceptual Issues It is conventional in this type of work to define the key concepts to be used in the work. The key concepts used in this work are Foreign Trade and Economic Growth. Usman (2011) conceives foreign trade as exchange of goods and services across 1

2 international boarders. In his performance evaluation of foreign trade and economic growth in Nigeria, using the popular ordinary least squares (OLS) method. Economic growth is conceived as a sustained increase in the per capita income over a period of time. (Clunnies, 2009). 2.2 Empirical Review on the Impact of Foreign Trade on Economic Growth Several researchers have conducted studies on the impact of foreign trade on economic growth. Massel, (1972), upon investigating the pattern of the economic growth of selected less developing countries using regression methods observed a high degree of association between exports and economic growth. They suggested that countries should aim at 2.5% expansion in export activities to obtain 1% increase in performance. Usman (2011) examined the performance evaluation of foreign trade and economic growth in Nigeria using the popular OLS techniques. He observed that export, import, and foreign exchange rate are all negatively related to the real output. Harrison (1996) synthesized previous empirical studies between openness and the rate of GDP growth, comparing the results from cross section and panel estimates while controlling for country effects. She concluded that correlation across openness measures seem to be positively associated with GDP growth. Fosu (1990) and Sachs and Warner (1997) through studies on various African countries, agreed that trade restrictions impact negatively on growth. In fact, Sachs and Warner (1997) found that lack of openness was the most significant contributor to the dismal economic growth performance in sub-saharan African. In their study, Guha-Khasnobis and Bari (2001) found openness measured by the Sachs- Warner criteria accounted for majority of the difference in total factor productivity growth between East and South Asia. They also found two apparently contrasting effects of openness and growth i.e which restricted trade regimes (in the sense of high tariffs), are positively associated with growth while unrestricted foreign investment regimes promote growth. While a substantial part of earlier studies showed evidence of correlation between exports and growth which was used to support the export led growth hypothesis, this tends to hold only for cross section studies. Recent evidence on time series analysis cast doubts on the positive effects of exports on growth in the long run (medina 2001). Krueger (1997) expressed in his work additional empirical demonstration of a strong association between export performance and economic growth by undertaking a comprehensive study of the role of export on the economic growth of 10 countries from A single non linear regression equation was specifically estimated for each of the chosen countries and she found exports and GNP to be highly correlated. Oyejide (1975), drawing a sample from 43 countries (including Nigeria), reported a positive relationship between average growth rates of GDP and export as a percentage of GDP over 1960 to 1976 period. Oviemuno (2007) look at international trade as an engine of growth in developing countries taking Nigeria ( ) a case study, he uses four important variables, which are export, import, inflation and exchange rate. The finding show that Nigeria s export value does not act as an engine of growth in Nigeria, Nigeria s import value does not act as an engine of growth in Nigeria and that Nigeria s inflation rate does not act as an engine of growth in Nigeria. III. METHODOLOGY 3.1 Method of Data Collection Data for this study was obtained from secondary sources specifically from World Bank s Data Base of Macroeconomic Indicators and Selected Statistics of African countries, an annual publication of ADB for a period of twenty one years. ( ). 3.2 Sample Size The study covers a total number of eight (8) countries out of 9 Countries of Central Africa region over a period of (21years), for which the data were provided by the World Bank s Data Base of Macroeconomics Indicators and African Development Bank. The countries were selected based on data availability. 3.3 Variable Measurements Dependent Variable Economic growth: this was expressed as annual GDP per capita at current prices for a given country which is in line with study of Obadan (2008), and Usman (2011) Independent Variables a. Export; was measured as value of total exports expressed in million of U.S dollars. The value for exports were in current price of the US$ and later expressed as a percentage of nominal GDP lin and li (2002), Perraton (1990). b. Import; it was computed as value of total imports expressed in million of U.S dollar. The value for import were in current prices of the US$ and later expressed as a percentage of nominal GDP Perraton (1990). c. Foreign exchange rate; it was expressed as the rate of national currency per US dollar at the end period. Oviemuno (2007), Usman (2011) Method of Data Analysis A panel dataset was analyzed using STATA econometric soft ware version According to Yaffee (2005) the ordinary least squares (OLS) regression, fixed effects and random effects models are among the commonly used models in analyzing panel data. The slope of coefficients, intercept and error term are also used as basis for selection of 2

3 diagnostic tools. The choice between Fixed Effects and Random Effects models will be influenced by the result of Hausman test which is commonly used as a way of choosing between fixed and random effects (Gujarati and Sangeetha, 2007). The diagnostic method employed is the Hausman test which tests the null hypothesis of non existence of a correlation between unobservable individual effects and the growth determinants against the alternative hypothesis of an existence of a correlation. If the null hypothesis is not rejected we can conclude that correlation is not relevant and therefore a panel model of random effect is the most correct way of carrying out the analysis of the relationship between foreign trade and economic growth (Yahya et al, 2013). 3.5 Model Specification In other to estimate the relationship between economic growth and the set of explanatory variables, this research specifies the following models growth it = β o + β 1 exp it + β 2 imp it + β 3 fer i t + µ it Where; growth = GDP growth exp = export imp= import fer = foreign exchange rate µ it = Stochastic Disturbance Term β o = Intercept β 1 = Coefficient of Export β 2 = Coefficient of Import β 3 = Coefficient of Foreign Exchange Rate. IV. DATA ANALYSIS AND DISCUSSION 4.1 Results of Panel Regression Model for Central African Table portray results of panel regression model for central Africa. The result of Hausman specification test chooses Random Effects model as more consistent. Regression Results for Central Africa relationship with GDP growth. While coefficient of imports is negative and statistically significant at 1% level. This imply that imports is negatively related with GDP growth in Central Africa. The coefficient of foreign exchange is positive and statistically insignificant related to GDP growth. The results of all the parameters estimated shares identical result with FE regression model. Furthermore, the R 2 for RE is (0.3019), suggesting that 30% of the variation in GDP could be ascribed to the joint influence of the predictors that is (Export, Import and Foreign Exchange). As for the adequacy of model, it appeared adequate with a record of (49.27) implying that the model is significant. DISCUSSION OF RESULTS The main aim of this study is to empirically investigate the relationship between foreign trade and economic growth in Central Africa. This section analyze the extent to which finding of this study confirm to or deviate from those of other researches of similar interest. This research found an evidence of positive and significant relationship between exports and economic growth in Central African countries which is in conformity with our priori expectation that exports spurs growth. This finding concurs that Balassa (1978) in his study of eleven countries that have an established industrial base discovers that the positive correlation between export growth and the GDP growth. Result from this study revealed that imports does not have any significant influence on economic growth in Central Africa. The negative relationship between imports and growth is in conformity with our priori expectation. The findings also concurs with the result of Oviemuno (2007) that imports does not act as an engine of economic growth. This research found an evidence of positive relationship between foreign exchange rate and economic growth in Central Africa, though the relationship is not statistically significant as such foreign exchange does not influence economic growth in Central Africa during the period under review. CONCLUSION AND RECOMMENDATIONS Source: Computed with STATA 10.0 using data from ADB and World Bank (2012). The parameters estimates for exports demonstrates a positive and statistically significant relationship at 1% level. Implying that exports has a positive On the basis of the findings of this research, the following conclusions are drawn: there is evidence of correlation between exports and growth which support the export-led growth hypothesis in Central Africa. This is evidenced by the positive significant relationship observed between exports and economic growth Based on the findings of this study, we may conclude that imports have a negative impact on economic growth, as such imports does not influences growth in the region. It is also concluded that foreign exchange 3

4 rate does not exert economic growth in Central Africa. Consequent upon the major conclusions of this study a number of recommendations have been identified below: a. The governments across the Central African region should encourage export diversification. This may be done through establishment of relevant agency, like Export Promotion Council. b. There is a need for Central African countries to reframe from excessive consumption of foreign goods and services and importation of capital goods should be emphasized. c. Government in Central African countries should consider the need of guiding the unguided exchange rate deregulation policy. The floating exchange rate system should be guided by the nations monetary authority. This will go along way of stabilizing the local currency in respect to other currencies of the world. d. Manufacturing industries should improve on the quality of their products so that their output would be competitive in the international market. BIBLIOGRAPHY Adewuyi, A. (2002), Balance of Payment Constraints and Growth Rate Differences under Alternative Policy Regimes National Institutes of Social and Economic Research (NISER) Monograph series No10 Ibadan, Nigeria. African Development Bank (2012), Selected Statistics on African Countries, Published by the Statistics Division of ADB, Tunis; Tunisia. Balassa, B. (1978), Exports and Economic Growth. Further Evidence, Journal of Development Economics, Vol. 5, No. 2, pp Clunnies, R. (2009), Development Economics, London Mc Graw Hills. Dollar, D. and Kraay, A. (2001), Growth is Good for the Poor World Bank Research Working Paper. Fosu, A.K. (1990), Exports Composition and the Impact of Exports on Economic Growth of Developing Economies, Economic letters. Guha-Khasnobis, B. and Bari, F. (2001). Sources of Growth in South in Asia Countries The United Nation University, WIDER Gujarati,N. and Sangeetha,D. (2007), Basic Econometrics New Delhi, Tata Mc Grew-Hill Publishing Company Limited. Harrison, A. (1996), Openness and Growth: A Time Series Cross Section Analysis for Developing Countries: Journal of Development Economic 48, Krueger, A.O. (1997), Trade Policy and Economic Development: How we learn, American Economic Review, 87(1), Lin,Y. and Li,Y. (2002), Cited in Usman, O. (2011), Performance Evaluation of Foreign Trade and Economic Growth in Nigeria Research Journal of Finance and Accounting Vol 2. No. 2. Massel, E. (1972) Foreign Exchange and Economic Development: An Empirical Study of Selected Latin American Countries. Review of Economics and Statistics, Page Medina, E.J. (2001), Is Export-led Hypothesis valid for Developing Countries? A Case Study of Costa Rica, Policy issues in International Trade and Commodities Study series, No.7 UNCTAD. Obadan, M. I. (2008), Economic Globalization, Market and National Development: Inaugural lecture series 98University of Benin. Obadan, M.I. and Okojie, I.E. (n.d) An Empirical Analysis of the Impact of Trade on Economics Growth in Nigeria. Jos Journal of Economics Vol.4, No.1. Oviemuno, K. (2007), International Trade as an Engine of Growth on Developing Countries, A Case Study of Nigeria ( ). Journal of Economics Perspective 12(4) Oyejide, A. (1975), Exports and Economic Growth in African Countries Economic International 2: Perraton, C. (1990), The Harrod Foreign Trade Multiplier and the Developing Countries; 1970 to 1985: An Examination of the Thaiwall Hypothesis, University of Nottinglian. Sachs, J.D. and Warner, A. (1997), Sources of Slow Growth in African Economy, Journal of African Economics, No. 6 Oxford. Usman, O.A. (2011), Performance Evaluation of Foreign Trade and Economic Growth in Nigeria: Research Journal of Finance and Accounting Vol. 2. No. 2. World Bank (2012) World Bank Database on Macroeconomics Indicators An annual publication of World Bank. World Trade Organization (2005), World Trade Report. World Trade Organization (2007), World Trade Report. Yaffee, R. (2005), A Primer for Panel Data: Analysis Retrieved from primer.html. Yahya, Z.A, Abubakar, S.A. and Shuaibu, S.S.(2013), Economic and Finance Review Vol.3(03)pp APPENDIX I LIST OF COUNTRIES CENTRAL AFRICAN COUNTRIES 1.ANGOLA 2.CAMEROON 3.CENTRAL AFRICAN REPUBLIC 4.CHAD 5.CONGO 6.DEMOCRATIC REPUBLIC OF CONGO 7.EQUATORIAL GUINEA 8.GABON 4

5 APPENDIX II STATA OUTPUT. use "C:\Users\Baba Musa\save.dta", clear. xtset countryid year, yearly panel variable: countryid (strongly balanced) time variable: year, 1991 to 2011 delta: 1 year. xtreg gdp exp imp fer Random-effects GLS regression obs = 123 Group variable: countryid groups = 8 R-sq: within = Obs per group: min = 9 between = avg = 15.4 overall = max = 17 Random effects u_i ~ Gaussian Wald chi2(3) = corr(u_i, X) = 0 (assumed) Prob > chi2 = gdp Coef. Std. Err. z P> z [95% Conf. Interval] - exp imp fer _cons sigma_u sigma_e rho (fraction of variance due to u_i). estimates store ols 17 overall = max = F(3,112) = corr(u_i, Xb) = Prob > F = gdp Coef. Std. Err. t P> t [95% Conf. Interval] exp imp fer _cons sigma_u sigma_e rho (fraction of variance due to u_i) F test that all u_i=0: F(7, 112) = Prob > F = estimates store fixed. xtreg gdp exp imp fer, re Random-effects GLS regression obs = 123 Group variable: countryid groups = 8 R-sq: within = Obs per group: min = 9 between = avg = 15.4 overall = max = 17. xtreg gdp exp imp fer, fe Fixed-effects (within) regression obs = 123 Group variable: countryid groups = 8 R-sq: within = Obs per group: min = 9 between = avg = 15.4 Random effects u_i ~ Gaussian Wald chi2(3) = corr(u_i, X) = 0 (assumed) Prob > chi2 = gdp Coef. Std. Err. z P> z [95% Conf. Interval] - 5

6 exp imp fer _cons sigma_u sigma_e rho (fraction of variance due to u_i) fixed random Difference S.E. - exp imp fer b = consistent under Ho and Ha; obtained from xtreg B = inconsistent under Ha, efficient under Ho; obtained from xtreg. estimates store random. hausman fixed random ---- Coefficients ---- (b) (B) (b-b) sqrt(diag(v_b- V_B)) Test: Ho: difference in coefficients not systematic chi2(3) = (b-b)'[(v_b-v_b)^(-1)](b-b) = 7.25 Prob>chi2 = (V_b-V_B is not positive definite) 6