ECONOMY

Trade Integration in the Economic Community Of West African States

Date - 17 / 04 / 2018

Trade Integration in the Economic Community Of West African States

Trade Integration in the Economic Community Of West African States: Assessing Constraints And Opportunities Using An Augmented Gravity Model
Rim Berahab – Abdelaaziz Ait Ali
(OCP Policy Center)

 

The proliferation of Regional Economic Communities (REC) in Africa underlines the importance of regional integration, which has become an essential priority for this region. Regional integration are indeed seen, as an important tool for the continent’s development, since one third of its economies are landlocked and depends on their coastal neighbors for trade. Besides, the domestic African markets are small, fragmented and below the critical size needed for companies to grow and achieve significant economies of scale. Accounting for nearly 17% and 30% of Africa’s surface area and population respectively, the ECOWAS is one of the most densely populated areas on the continent. Despite its great potential in terms of human and natural resources, the ECOWAS still faces obstacles to achieve an effective regional integration. Indeed, the performance of its intra-regional trade remains very modest compared to other economic blocs of the world. Intra-regional trade is limited, in fact, to around 10% while, it exceeds 20% in the East African Community for instance and 25% in the Association of Southeast Asian Nations (ASEAN) in 2016. Therefore, it becomes crucial to investigate the existence of a potential for intra-regional trade in the ECOWAS as well as the constraints for its realization.

It is recognized that the potential of regional integration in Africa has been largely untapped (UNCTAD (2013) and ADB (2017)). Studies such as Geda & Seid (2015) and Ebaidalla & Yahia (2015) have shown how significant is this potential between African countries. Using a standard gravity model, they projected the intra-flow of trade and revealed the huge potential for trade expansion. The majority of African countries seems to operate well below the potential and are not reaping the benefits of the trade liberalization. These studies concluded, however, over the necessity to upgrade the quality of infrastructure and diversify their productive fabric to further economic integration. However, the structural poor performance of trade integration casts doubts over the fitness of standard empirical models and the deployed approach to estimate the trade potential. This calls for an innovative approach and methodology to tackle this issue. Thus, it is imperative to revive this old issue capitalizing on a new approach to assess whether Africa, in the case of ECOWAS, is likely to witness an improvement in its integration dynamic in the medium term.

This paper contributes to the literature in three main ways. First, it estimates a gravity model to explain trade flows inside a REC with a Free Trade Area (FTA) to address the heterogeneity of trade policies adopted towards economic partners outside the REC. Second, it simulates trade potential inside the ECOWAS region, using coefficients estimated over a well-integrated region, such as the ASEAN. If, otherwise, we perform the estimation over the ECOWAS region (with their economic partners in this case) and then simulate the potential, the simulation is likely to project the same dynamics and end up with trade potential around the observed data. Third, it deploys an augmented version of the gravity model that controls for the quality of infrastructure and the bilateral complementarity between economic partners and then compares simulations to those of a basic form of the gravity model. Following this spirit, the paper is organized as follows: a first section is dedicated to a brief overview of the trade structure of the ECOWAS countries and analyses some relevant trade indicators. A second section attempt to overview the literature on this issue. The third section describes the model and the data while the fourth section discusses the result estimation and the simulations output for the ECOWAS. By offering policy recommendations, section five concludes.

 

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