Determinants of a Successful Regional Trade Agreements in West Africa Presented by Idris Ayodeji ADEMUYIWA Centre for Econometrics and Allied Research (CEAR) University of Ibadan, Ibadan Nigeria

Table of Content The Problem Objectives Stylized Facts on ECOWAS Trade Brief Review of Literature Methodology Empirical Results Policy Implications ACRIA 3 Conference, Dakar, SENEGAL

The Problem In the past two decades, regional trade agreements (RTAs) around the world have grown rapidly in their different forms and scopes. For instance, they increased from about 400 in 2006 (Whalley, 2006) to about 511 as at January, ACRIA 3 Conference, Dakar, SENEGAL

The Problem (cont’d) Africa has not been spared of these proliferation as the continent now has about 30 RTAs with each country belonging to at least four (World Bank, 2004) The goal of these RTAs includes the attainment of both economic and non- economic objectives….. ACRIA 3 Conference, Dakar, SENEGAL

The Problem (cont’d) It is not in doubt that Africa has the potential to expand trade and gain from RTA induced trade. For example, Oyejide (2003) noted that; “ trade-led growth can reduce rural poverty when it expands employment in small-holder agriculture and can lower urban poverty when it is associated with increased output and exports of labor-intensive manufactures….” ACRIA 3 Conference, Dakar, SENEGAL

The Problem (cont’d) Sadly, empirical studies have revealed that the level of intra-African trade despite the presence of RTAs has been very disappointing (see for example, Bundu, 1995; Elbadawi, 1997; Ogunkola, 1998; Cassim, 2001; Longo and Sekkat, 2004 and Yang and Gupta, 2005) For West Africa in particular, concerns have been raised about the possible negative effect of overlaps between existing RTAs on intra-regional trade (Robert, 2004). ACRIA 3 Conference, Dakar, SENEGAL

The Problem: the gap Despite these concerns, only little efforts have been made to empirically investigate the trade effect of the two major RTAs in the region (that is, WAEMU and WAMZ). Considering the current wave of political crisis in the region, there is also a need to examine the effect of political instability on intra-regional trade amongst other determinants. ACRIA 3 Conference, Dakar, SENEGAL

Objectives The main objective of the paper is to examine the determinants of bilateral trade among member countries in West Africa. It also attempts to empirically investigate the trade effect of RTAs in West Africa to ascertain whether or not they create or divert trade. ACRIA 3 Conference, Dakar, SENEGAL

Objectives (cont’d) It is in our opinion that a parent regional trade agreement (RTA) like ECOWAS will succeed if it is able to; promote bilateral trade between member countries in the region prevent a case of trade diversion by the smaller RTAs in the region. ACRIA 3 Conference, Dakar, SENEGAL

Stylized Facts on ECOWAS Trade Apart from intra-regional trade, ECOWAS as a common market trades with other regions in Africa and other RTAs in the world. We therefore set out to look at the trends in this trade categorization between the period 1995 to ACRIA 3 Conference, Dakar, SENEGAL

Stylized Facts: Intra-regional Trade ACRIA 3 Conference, Dakar, SENEGAL CountryPeriodBENBFACIVGHAGMBGINMLINERNGASENTGO Share in Total (in %) Table 1: Percentage Share of ECOWAS Countries in Intra-regional trade Table 1 reveals that only a few countries dominate trade within the ECOWAS region. They include Nigeria, Cote-d’Ivoire and Ghana while other countries contribute relatively little to trade overtime. Source: Authors’ Computation from UNCTADSTAT, 2011

Stylized Facts: Trade with Developing and Developed countries ACRIA 3 Conference, Dakar, SENEGAL Figure 1 shows that the region trades more with the developed countries overtime although the gap appears to be narrowing in recent times. Figure 1: Percentage Share of Developing and Developed Countries in ECOWAS' Total Trade ( )

Stylized Facts: ECOWAS Trade with other Sub-regions in Africa ACRIA 3 Conference, Dakar, SENEGAL Figure 2: Percentage Share of African Regions in ECOWAS' Trade ( ) Figure 2 reveals that the Southern African region is increasingly dominating trade with ECOWAS in terms of intra-African trade. It is followed by Middle Africa which has been losing its contribution despite the proximity.

Stylized Facts: ECOWAS trade with other RTAs in the World ACRIA 3 Conference, Dakar, SENEGAL Figure 3: Percentage Share of the major RTAs in ECOWAS' Total Trade ( ) Figure 3 shows that out of the 16 major RTAs constituting ECOWAS’ trading partners, EU, APEC, FTAA and NAFTA play more significant roles. However, the share of EU has been declining while the others’ have been increasing.

Stylized Facts: Comparison of Intra- ECOWAS and Extra-ECOWAs Trade ACRIA 3 Conference, Dakar, SENEGAL Figure 4: Percentage Share of Intra-ECOWAS and Extra-ECOWAS trade in Total Trade ( ) Figure 3 reveals there has been no significant increase in the ratio of Intra- ECOWAS trade to total trade.

Brief Review of Literature Recent literature related to the study are multi-facet and myriad but can be broadly categorized as; Those that have examined trade flows, trade potentials, and prospects in different parts of the world (see Papazoglou, 2007; Bhattacharya and Bhattacharya, 2007; Athukorala, 2012 among others) and in Africa (see Ogunkola, 1998; Cassim, 2001 and Salisu et al., 2012 among others). Those that have examined the effects of RTAs on regional trade i.e. in terms of their trade creation or diversion effects using different methodologies (see Musila, 2005; Carrere, 2006; Baier and Bergstrand, 2007; Jugurnath et al., 2007; Magee 2008; Abott et al., 2008; Egger et al., 2008; Martinez- Zarzoso et al., 2009; Hur et al., 2010;Egger and Larch, 2011 and Foster et al., 2011 among others) ACRIA 3 Conference, Dakar, SENEGAL

Review of Literature (cont’d) Results from most studies in the latter category (which are of particular interest to our study) have revealed that RTAs around the world have mostly had positive impact on regional trade. However, some studies have noted that this result might not be the same in cross-sectional studies where country specific effects and country-pair effects are not provided for (see Baltagi et al., 2003; Longo and Sekkat, 2004; Carrere, 2006; Baier and Bergstrand, 2007; Jugurnath et al., 2007; Magee, 2008; Vicard, 2011; Athukorala, 2012 to mention but a few) ACRIA 3 Conference, Dakar, SENEGAL

Review of Literature (cont’d) On the determinants of bilateral trade between members of RTAs across regions, factors such as; the trading partners Gross Domestic Product (GDP), transportation cost (usually proxied with bilateral distance), sharing of a common border, common language, GDP per capita, landmass or area, population of partners among others have been found to be significant to bilateral trade ACRIA 3 Conference, Dakar, SENEGAL

….from the review of literature To the best of our knowledge, with the exemption of a few studies (including, but not limited to Musila, 2005; Agboji, 2008 and Coulibaly, 2009), little effort has been geared towards examining the effects of RTAs in ECOWAS on trade flows. The present study is an attempt to bridge the gap with particular emphasis on WAEMU and WAMZ and examine the determinants of bilateral trade in the region. ACRIA 3 Conference, Dakar, SENEGAL

Methodology: Data scope and source Data used covers a period of 16 years (i.e. from 1995 to 2010) for 11 ECOWAS member countries. They were obtained from UNCTADSTAT (2011), World Development Indicators (WDI) Database, CEPII Distance Database and World Governance Indicators (2011). ACRIA 3 Conference, Dakar, SENEGAL

Methodology: Our model In line with our objectives, we estimate two modified gravity models. The first, following our objective is specified as below; ACRIA 3 Conference, Dakar, SENEGAL

Methodology: Our model In order to examine the trade creation or trade diversion effects of WAMZ and WAEMU, we include their respective regional integration dummies as done by Carrere, (2006), Jugurnath et al., (2007) and Martinez-Zarzoso et al., (2010), thus we re-specify (1) as; ACRIA 3 Conference, Dakar, SENEGAL

Methodology (cont’d) The specifications allow for the inclusion of both country specific characteristics (like landlockedness, area, economic policy, infrastructural development and political stability) and country pair characteristics (like border and language). We employ the Least Square Dummy Variable (LSDV) approach of fixed effect to estimate the model as it allows for the dummy variables to capture the afore-stated characteristics. ACRIA 3 Conference, Dakar, SENEGAL

Empirical Results Our findings reveal that economic size (usually proxy with GDP), distance, geographical factors like common border, landmass, landlockedness of countries and socioeconomic factors like common language, political stability and availability of infrastructures significantly influence bilateral trade within the ECOWAS region. ACRIA 3 Conference, Dakar, SENEGAL

Empirical Results (RTA Dummies) For the period 1995 to 2010, our empirical results show that while the formation or existence of WAEMU as a regional arrangement has resulted in trade creation in terms of exports, it has also given rise to a diversion of imports. This result conforms to the findings by Agboji, (2008) and Coulibaly, (2009). ACRIA 3 Conference, Dakar, SENEGAL

Empirical Results (RTA Dummies) For WAMZ, our results reveal that the existence of WAMZ has resulted in both exports and imports expansion to non- WAMZ members within the ECOWAS region. However, there exists a low level of intra- WAMZ exports. This study, to our knowledge, is on of the few that have examined the trade effect of WAMZ in the ECOWAS region. ACRIA 3 Conference, Dakar, SENEGAL

Policy Implications: From our results Some literature posit that the negative effects of geographical factors like landlockedness, bilateral distance and area on trade are beyond the control of policy makers, we think otherwise! Given the importance of socio-economic factors to bilateral trade, it is imperative for policy makers to develop human capital through health and education so as to increase employment and productivity necessary to boost income. ACRIA 3 Conference, Dakar, SENEGAL

Policy Implications (cont’d) Perhaps there is no other factor as significant to the success of any regional trade agreement in West Africa as political stability is. Therefore, we recommend that more concerted efforts from all stakeholders should be geared towards prevention and prompt resolution of conflict and political instability in the region especially since the security problem has taken a contagious effect dimension. ACRIA 3 Conference, Dakar, SENEGAL

Policy Implications (cont’d) Concerns raised about possible institutional overlaps between RTAs in West Africa and the consequent effects on regional trade seems valid, though exaggerated. Therefore, efforts at forming a synergy between WAEMU and ECOWAS should take cognizance of promoting trade between them, irrespective of colonial origin, to prevent a case of intra-ECOWAS trade diversion. ACRIA 3 Conference, Dakar, SENEGAL

Final note….. We do not claim that a holistic study has been conducted as some other issues (not incorporated into this study) are salient to intra-ECOWAS trade…. However, we are optimistic that ECOWAS will be more successful if it is able to promote intra-regional trade and prevent trade diversion (or discriminatory trade) by the smaller RTAs in the region. ACRIA 3 Conference, Dakar, SENEGAL

Thank you all for listening……..! ACRIA 3 Conference, Dakar, SENEGAL