How Viable is ECOWAS in Promoting Intra-Regional Trade in Africa? Evidence from Gravity Model

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1 How Viable is ECOWAS in Promoting Intra-Regional Trade in Africa? Evidence from Gravity Model A contributed Prepared for Presentation at the African Economic Conference (AEC), October 28-30, 2013, Johannesburg, South Africa Abstract The purpose of this paper is to empirically analyse the effect of ECOWAS on Africa s trade patterns based on the gravity model and to suggest possible ways to expand trade by identifying important factors determining ECOWAS member countries bilateral trade flows by estimating the trade performance of ECOWAS member countries using gravity model. ECOWAS and WAEMU were included in the data tom capture the effects of these RTAs on trade flows. We use recent data from OLS and Tobit model was used to analysis the gravity equation. The results show that majority of the included variables have the expected signs, but most importantly, the RTAs variables are both positive and statistically significant in determining trade flows among the ECOWAS countries. In conclusion, regional trade arrangements are essential for trade growth and economic development of developing countries. Hence, it is recommended that the current RTAs in Africa should be strengthened. All the major issues hindering the effective performance of these arrangements should be looked into and properly addressed. 1.0.Introduction Trade is fundamental part of all economic and development efforts, national economic growth, industrialization and technological knowledge. Through specialisation and an enhanced division of labour, the theory of comparative advantage states that increased openness to trade can boost the level of consumption and incomes in an economy. A significant body of international evidence confirms this proposition suggesting that greater 1

2 openness to trade is, on average, associated with faster growth and increasing productivity (Winters and Masters, 2010). Evidence suggests that enhancing trade has a positive effect on both the growth and level of income. One of the notable ways to enhance trade is through regional integration. Regional integration is particularly relevant to the economies of Africa due to many factors. For example, Africa consist of 53 sovereign states with differ languages and cultural background. Many of these countries have very small economies, undiversified and suffer from weak infrastructure: in constant 2000 dollars, the GDP of the median African economy is USD 5.2 billion. With the numerous countries, small economies, low population density and many landlocked nations; on average, each country has four neighbours, and 15 African countries are landlocked, regional integration is absolutely pivotal to generating high rates of economic growth and development in Africa. Additionally, the effect of geographical fragmentation in Africa is amplified by the fact that African countries trade very little among themselves. Intra-African trade was 10% of Africa s total trade in 2009, a relatively small share compared with other developing country regions such as America (22%) and Asia (50%) (African Union, 2010). According to UNDP (2011) economic integration would allow small economic entities to benefit from the scale created by unified markets and improve resilience by leveraging common capacities to respond to individual vulnerabilities. It is hoped that the combination of larger markets, tougher competition, more efficient resource allocation, and various positive externalities will attract more Foreign Direct Investment (FDI) and raise the growth rates of the participating economies (Franko, 1976; Pelkmans, 1984; Brenton et al.,1998; Te Velde and Bezemer, 2004). Regional integration increases competition in global trade and improves access to foreign technology, investment, and ideas. In spite of the aforementioned positive impact of regional integration and the evidences that abound in relation to the benefits many countries across the globe have gained from regional integration, African countries seem not have derived much and have on the overall been left behind. The major concern is the fact that Africa trades very little with itself. According to UNECA (UNECA 2010), between 2000 and 2009 Africa sourced a stable 9% of its total imports from African countries, while 8% of its exports were sold to African countries. International trade statistics indicate that African countries share in world trade has declined 2

3 from around 6 % 25 years ago to about 2%; less than 1%, if South Africa is excluded (UNECA, 2008). This trend points to the continent s increased marginalization in the context of world trade. While intra-african trade has grown, there has been little increase of its share in Africa s total trade; rising only by 1 percentage point from 9.7% in 2000 to 10.8% in In contrast, in other parts of the world intra-regional trade is a much larger share of total trade for the region. Similarly, exports of manufactured goods in SSA are low. With 45% of SSA exports in 2009 accounted for by fuels SSA is more dependent on primary commodity exports than any other region in the world. While lowering barriers to trade between SSA countries is important the objective of regional integration should not be to increase intra-regional trade per se but rather to enhance trade both within the region and more importantly the rest of the world. Presently, the United Nation (UN) classifies 73% of West African states as Least Developed Countries (LDCs). ECOWAS accounts for 35% of the African LDCs-making West Africa the foremost LDC region in Africa and, indeed the world as a whole (Sesay and Omotosho, 2011). In addition, several studies have suggested that the small size of Western African economies renders them ineffective in determining the direction of foreign trade (Ezekwesili, 2011). Furthermore, The Economic Community of West African States (ECOWAS) ranks among the most advanced African regional grouping in services liberalization. Therefore, the main focus of this study is to access the viability of ECOWAS in fostering intra African trade and by extension encouraging Africa integration to the global trade. This study differs from previous ones in the sense that it utilizes both the Tobit and panel data approach to analyse the gravity model and focusing on more recent data. In addition the study instead of pooling the data across countries, we estimate a single equation for three selected countries among the ECOWAS member countries. This provides us with a better understanding of the impact of ECOWAS on the individual country. This study is organized into six sections. Section 1 gives the introduction and background to the study. Section 2 contains a brief review of the literature. The analytical framework and estimation techniques are presented in section 3. Data and descriptive statistics is presented in section 4. The empirical results and findings are presented in section five. Finally section, 6 presents the major summary, conclusion and some policy recommendations. 3

4 2.0. Literature Review 2.1. An Overview of Regional Integration in Africa Africa is the world's second-largest and second-most-populous continent. At about 30.2 million km² including adjacent islands, it covers six per cent of the Earth s total surface area and 20.4 per cent of the total land area. With 1.0 billion people (as of 2009), it accounts for about 15% of the world's human population. Regional integration has been identified by many researchers as the key strategy that will enable African governments to accelerate the transformation of their fragmented small economies, expand their markets, widen the region s economic space, and reap the benefits of economies of scale for production and trade, thereby maximizing the welfare of their nations (UNECA, 2010). Consequently, regional integration has been in Africa s development plan for most of the post-independence period. African leaders view regional integration as an important path to broad based development and a continental economic community, in accordance with the Treaty Establishing the African Economic Community (1991) and the Constitutive Act of the African Union (2000). Regional integration initiatives in Africa have a long history, dating back to the establishment of the South African Customs Union (SACU) in 1910 and the East African Community (EAC) in Since then a number of regional economic communities have been formed across the continent, particularly since the 1970s. Currently there are about 10 or so regional economic groupings in Africa. Today there is no country in Africa that isn t a member of at least one regional economic group. As reflected in the number of regional agreements both in the continent and world- wide, therefore, the issue continues to occupy a center-stage in the economic agenda of countries. According to Nnanna (2006), there are five major sub- regional economic integration arrangements that encompass all the countries in Africa (Table 1). These are the Arab Maghreb (AMU), The Common Market of Eastern and Southern Africa (COMESA), The Economic Community of Central Africa State (ECCAS), Economic Community of West African State (ECOWAS); and the Southern African Development Community (SADC). These larger arrangement also consist of other subsets and these include the Central Africa Economic and Monetary Community (CEMAC), a group of six countries of ECCAS; The Great Lakes River Basin (CEPGL), consisting of three members of ECCAS; the East African 4

5 community of COMESA, and SADC, the Indian Ocean Commission (IOC) grouping five countries, four of which are in COMESA and one of which (Reunion) is a dependence of France. Other integration arrangements include the Intergovernmental Authority for development (IGAD); embracing seven countries in the Horn of Africa and the Northern part of East Africa; the Mano River Union (MRU) with three countries which are also members of ECOWAS; The West African Economic and Monetary Union (UEMOA/WAEMU) consisting of eight members of ECOWAS; and Southern Africa Custom Union (SACU) with five member countries of the SADC; the West African Monetary zone (WAMZ) comprising five members of ECOWAS. Table 1: African Free Trade Areas and Customs Unions Major Regional Economic Communities Arab Maghreb union Common Market for Eastern and Southern Africa (COMESA) Community of Sahel- Saharan states (CENSAD) Economic Community of Central African States (ECCAS) Economic Community of West African States (ECOWAS) Typ e Free trade area (FT A) FTA FTA FTA FTA Area of integrati on and cooperat ion Goods, services, investme nt and migratio n Goods, services, investme nt and migratio n Goods, services, investme nt and migratio n Goods, services, investme nt and migratio n Goods, services, investme nt and Date entry force of into 17 Feb Member states Algeria, Libya, Mauritania, morocco, Tunisia, Arab Jamahiriya 8 Dec Angola, Burundi, Comoros, Democratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Namibia, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia, Zimbabwe 4 Feb Benin, Burkina faso, cenralafrican republic, chad, cote d ivoire, Djibouti, egypy, Eritrea, gambia, Libya, mali, morocco, niger, Nigeria, Senegal, Somalia, sudan, togo, Tunisia 1 July, 2007 Angola, Burundi, Cameroon, Central African Republic, Chad, Congo, Democratic Republic of congo, equatorial guinea, gabon, saotome and principe, Rwanda 24 July, 1993 Benin, Burkina Faso, Cape Verde, Cote d Ivoire, The Gambia, Ghana, guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Specific objectiv es Full economi c union Common market FTA, and integrati onin some sectors Full economi c union Full economi c union 5

6 Intergovernmental authority on Development (IGAD) Southern African Development Community (SADC) Economic and Monetary Community of Central Africa (CEMAC) East African Community (EAC) Southern African Customs Union (SACU) West African Economic and Monetary Union (UEMOA) FTA FTA Cust oms Unio n Cust oms Unio n Cust oms Unio n Cust oms Unio n Source: UNCTAD, 2009 migratio n Goods, services, investme nt and migratio n Goods, services, investme nt and migratio n Goods, services, investme nt and migratio n Goods, services, investme nt and migratio n Goods, services, investme nt and migratio n Business law harmoniz ed, macroec onomic policy converge nce in place 25 Nov Sierra Leone, Togo Djibouti, Eritrea, Ethiopia, Kenya, Somalia, Sudan, Uganda, 1 Sep Angola, Botswana, democratic republic of the Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, south Africa, Swaziland, Tanzania, Zambia, 24 June, 1999 Zimbabwe Cameroon, central Africa republic, chad, Congo, Equatorial Guinea, Gabon 7 July, 2000 Kenya, Tanzania, Uganda, Rwanda, Burundi 15 July Jan, 1994 Botswana, Lesotho, Namibia, south Africa, Swaziland Benin, Burkina Faso, Cote d Ivoire, Guinea-Bissau, Mali, Niger, Senegal, Togo Full economi c union Full economi c union Full economi c union Full economi c union Custom union Full economi c union 6

7 2.2. Overview of Regional Economic Integrations in West Africa There are three notable regional economic integrations in West Africa; however, ECOWAS appears to be the largest comprising of about 15 member countries. While, Mano River Union (MRU), and UEMOA has three and seven member countries, respectively Economic Community of West African States (ECOWAS) West Africa is that part of Africa that is bounded in the West and South by the Atlantic Ocean, the Sahara desert on the North, and on the East by the eastern boundaries of present day Nigeria. Practically, it is that area of Africa that is encircled in the North by a line running from the Senegal River to Lake Chad, in the East by a line running from Lake Chad to the Cameroon Mountains, and in the south and west, by the Atlantic Ocean coastline. As revealed by Carstens, (2011) the formation of ECOWAS is credited to the dogged determination of Adebayo Adedeji, erstwhile Executive Secretary of the United Nations Economic Commission for Africa (ECA), who was convinced that Africa would not be able to compete with the rest of the world unless it is united economically and politically; and that such a process should start at the much smaller regional level. Therefore, On 28 May 1975 the leaders of West African States assembled in Lagos created the Community of West African States called ECOWAS. Its major aim is to promote corporation and development in all field of economic activity, particularly in the field of industry, transport, telecommunication, energy, Agriculture, natural resources, commerce, monetary and financial questions and in all social and cultural matters for the purpose of raising the standard of living of its people among other (UNECA, 2012). It is considered one of the pillars of the African Economic Community. It also serves as a peacekeeping force in the region particularly during the Liberia civil war. According to Sesay and Omotosho, (2011), ECOWAS is unprecedented in at least two important respects. First, it brought together for the first time 15 West Africa countries, irrespective of linguistic, colonial and pre-colonial history and experiences, in one regionwide organisation. Second, the creation of ECOWAS was also a clear indication of the determination by West African leaders to enhance the pre-colonial ties among their people, and to weaken the adverse social and economic legacies of the colonial era. The ECOWAS Treaty requires the Community to ensure the removal of obstacles to the free movement of 7

8 persons, goods, services and capital, and to guarantee the right of residence and establishment. West Africa s trade pattern is outwardly oriented towards the developed countries of the North. The poor trade performance of the region is revealed in table. Exports are overwhelmingly raw produce, while the region depends on imports for most of its needs, including food, from the same source. Indeed West Africa s trade and aid dependence on the traditional Northern development partners have remained virtually the same since the flush of independence more than five decades ago. Except for Nigeria the markets of other ECOWAS states are small, making them uncompetitive and unattractive to the outside world. Successful regional integration is believed to increase the size of the local market; enhance competition and efficient production, due to economies of scale. All things being equal, then, it is much easier for the enlarged West African market to attract foreign investment that will benefit the region provided the investors do not engage in tariff-jumping. The Institutions of the Economic Community of West African States (ECOWAS) are as follows: The Commission, the Community Parliament, the Community Court OF Justice, ECOWAS Bank for Investment and Development (EBID). The ECOWAS commission and the EBID more often called the Fund are its two institutions designed to implement policies, pursue a number of programmes and carry out development projects in member states. Such projects include intra-community road construction and telecommunication; agriculture, energy and water resources management. The ECOWAS consists of two institutions to implement policies the ECOWAS Commission and the ECOWAS Bank for Investment and Development, formerly known as the Fund for Cooperation until it was renamed in Table 2 : ECOWAS Trade Performance index Year Intra-ECOWAS trade Intra- ECOWAS GDP/capita ECOWAS GDP share intensity index ECOWAS in world GDP Trade Share

9 Source: UN COMTRADE Data, West African Economic and Monetary Union (WAEMU) The list of the various RTAs in West Africa and their member countries is presented in Table 3. The West African Economic and Monetary Union (also known as UEMOA from its name in French, Union économique et monétaire ouest-africaine) is an organization of eight West African states. It was established to promote economic integration among countries that share the CFA franc a common currency. UEMOA was created by a Treaty signed at Dakar, Senegal on 10 January 1994, by the heads of state and governments of the member countries. UEMOA is a customs union and currency union between the members of ECOWAS. Its objectives include the following are as stated below: Greater economic competitiveness, through open markets, in addition to the rationalization and harmonization of the legal environment The convergence of macro-economic policies and indicators The creation of a common market The coordination of sectoral policies The harmonization of fiscal policies Among its achievements, the UEMOA has successfully implemented macro-economic convergence criteria and an effective surveillance mechanism. It has adopted a customs union and Common External Tariff and has combined indirect taxation regulations, in addition to initiating regional structural and sectoral policies. A September 2002 IMF survey cited the UEMOA as "the furthest along the path toward integration" of all the regional groupings in Africa. ECOWAS and UEMOA have developed a common plan of action on trade liberalization and macroeconomic policy convergence. The organizations have also agreed on 9

10 common rules of origin to enhance trade, and ECOWAS has agreed to adopt UEMOA s customs declaration forms and compensation mechanisms. The Treaty establishing WAEMU, confers the right of free movement of people, the right to provide services, the right of establishment and the right of residence to natural and juridical persons of its member states. In addition, it provides for non discrimination in respect of the right to seek and engage in employment West African Monetary Zone (WAMZ) The West African Monetary Zone (WAMZ) was established in year It consists of six countries within ECOWAS and the ultimate plan is to introduce a common currency, the Eco by the year All the member states are English speaking except Guinea, which is Francophone. A notable objective of the WAMZ is to establish a strong stable currency to rival the CFA franc, whose exchange rate is tied to that of the Euro and is guaranteed by the French Treasury. On the overall, the basic goal is for the CFA franc and Eco to merge, giving all of West and Central Africa a single, stable currency Mano River Union A significant but limited breakthrough was achieved in 1973 when Liberia and Sierra Leone created the Mano River Union, MRU, to promote economic and political cooperation between their contiguous countries. The Union was joined by Guinea under Sekou Toure a decade later in 1983; the year that also witnessed the creation of the larger Communaute Economique de L ouest, CEAO, among the French speaking West African countries. The Mano River Union (MRU) is an international association established in 1973 between Liberia and Sierra Leone. In 1980, Guinea joined the union. The goal of the Union was to foster economic cooperation among the countries. It is named for the Mano River which begins in the Guinea highlands and forms a border between Liberia and Sierra Leone. Due to conflicts involving the countries the objectives of the Union could not be achieved However, on May 20, 2004, the Union was reactivated at a summit of the three leaders of the Mano River Union states, Presidents Lansana Conté of Guinea, Ahmad Tejan Kabbah of Sierra Leone and Chairman Gyude Bryant of Liberia. On April 1, 2008, Cote d'ivoire agreed to join the union during a state visit by President Ellen Johnson-Sirleaf. President Johnson- Sirleaf is currently the cha 10

11 ir of the MRU. Table 3: Membership of Regional Integration Agreement in West Africa ECOWAS-1975 MRU-1973 WAEMU-1994 WAMZ-2000 Benin Guinea Benin Liberia Burkina Faso Liberia Burkina Faso Gambia Cape Verde Sierra Leone Cote d Ivoire Ghana Cote d Ivoire Guinea Bissau Guinea The Gambia Mali Nigeria Ghana Niger Sierra Leone Guinea Togo Guinea Bissau Liberia Mali Niger Nigeria Senegal Sierra Leone Togo Source: UNCTAD Handbook of Statistics (2005) Figure 1: Map of West Africa Showing ECOWAS Member Countries Source: Adapted from ECOWAS Official Website [online]. 11

12 2.3. Some Basic Characteristics of ECOWAS Countries Some of the unique characteristics of the ECOWAS member countries are presented in Table 4. Many of these countries are colonised by different colonial rulers. At least 8 of these countries were colonised by France. Thus language is major barrier to proper economic integration as the ECOWAs comprises of at least 5 different foreign languages. The member countries also differ in the kind of currency use for transaction. Although, most of the francophone countries have adopted the CFA France as a common currency, however trade within the ECOWAS member countries could still be hindered by the lack of common acceptable currency throughout the West Africa region. Table 4: Some Basic Characteristics of ECOWAS Countries Country Official language Monetary Unit Population Land Area (KM 2 ) Colonia Rulers Benin French CFA Franc France Burkina-Faso French CFA Franc France Cape Verde Crioulo(creole Portuguese) Escudo Portugal Cote d Ivoire French CFA Franc France Gambia English Dalasi Britain Ghana English Cedi Britain Guinea French Syli France Guinea -Bissau Guinea-crioulo Guinea Peso Portugal Liberia English Liberia Dollar America Mali French Mali Franc France Niger French CFA Franc France Nigeria English Naira Britain Senegal French CFA Franc France Sierra Leone English Leone Britain Togo French CFA Franc France Sources: various publications 2.4. Major ECOWAS Countries Exporters and Imports ( ) The fact that trade within ECOWAS member countries is minimal has been widely attested to in the literature. As shown in Table 4, majority of the member countries imports are from the developed countries, while, few also export to member countries. Thus, trade among member countries is still highly negligible. This could be due in part to the primary nature of the regions export and lack of value addition. 12

13 Table 5: Major ECOWAS Countries Exporters and Imports:( ) Country Major Exporters Major Importers Benin China, India, Brazil, Nigeria*, Indonesia France, China, Cote d Ivoire*, United Kingdom (U.K), Ghana* Burkina-Faso Switzerland, France, Belgium, Cote d Ivoire*, France, China, USA, India Luxembourg, Singapore, Cote d Ivoire Cape Verde Portugal, Spain, United States (US), Portugal, Netherland, Spain, Brazil, Italy Morocco, France Cote d Ivoire France, Netherland, U.S.A., Nigeria*, Italy Nigeria*, France, China, Germany, USA Gambia Senegal, U.K, Guinea, France, Guinea- China, Senegal*, Brazil, Cote d Ivoire*, Bissau* Netherlands Ghana Netherlands, UK, France, US, Germany China, Nigeria*, US, UK, India Guinea East, Southern and North Africa, Europe, Europe, EU, North America, Cote d Ivoire China Guinea India, Singapore, China Senegal*, Portugal, China, France, India Bissau Liberia Germany, Bangladesh, Poland, US, Korea Rep., Singapore, Japan, China, Germany Belgium Mali Switzerland, South-Africa, Senegal*, France, Senegal, Cote d Ivoire*, Togo*, Cote d Ivoire*, China Benin* Niger France, Nigeria*, US, Japan, Switzerland France, China, US, Nigeria*, Cote d Ivoire* Nigeria USA, Brazil, Spain, France, Japan USA, UK, Germany, Japan, France Senegal Mali*, India, France, Italy, Spain France, Nigeria*, Thailand, China, Spain Sierra Leone Belgium, France, US, Germany, India Germany, UK, Cote d Ivoire*, US, China Togo Benin*, Burkina-Faso*, Ghana*, Germany, Netherlands, Italy, France, Cote Netherlands d Ivoire* Source: African Statistical Yearbook, 2012 Note: * ECOWAS member countries 2.5. Performance Indicators of Regional Integrations in Africa The exports of ECOWAS countries remain heavily dependent on foreign destinations, with 27.6 per cent for the United States, followed by the Euro zone with 23.1 per cent, and India, which does better than the whole community together, with 9.5 per cent. The profile is more or less the same for imports which originate first from the Euro zone with 25.3 per cent, China with 25.8 per cent, then a bit lower the United States with 8.4 per cent. The situation is the same in the UEMOA, with the Euro zone being predominant for exports as well as imports with 24.2 per cent and 30 per cent, respectively. Nigeria plays an important role in trade with the UEMOA countries with 7.3 per cent for exports and 10.4 per cent for imports, primarily due to petroleum products. 13

14 Table 6: Principal trade partners of Africa and its RECs in 2010 Exports Imports Africa/Regional Integrations Principal Partner countries Total Principal Partner countries Total Africa Euro zone (30.2%) United States (16.8%) China (13.2%) 68.0% Euro Zone (28.1%) China (12.1%) United States (6.3%) South Africa (4.0%) 53.9% ECOWAS United States (27.6%) Euro Zone (23.1%) India (9.5%) Brazil (5.3%) South Africa (3.0%) UEMOA* Euro Zone (24.2%) Nigeria (7.3%) United States (6.5%) Ghana (4.7%) Source: UNDP, % 42.6% India (3.4%) Euro Zone (25.3%) China (14.8%) United States (8.4%) Nigeria (4.7%) India (4.3%) Euro Zone (30.0%) China 911.4%) Nigeria (10.4%) United Kingdom (3.6%) 57.5% 55.4% 2.6. Index of Economic Freedom The index of economic freedom is essential in the assessment of trade flow and degree of openness among the ECOWAS member countries. The Index of Economic basically is an annual index and ranking created by the Heritage Foundation and The Wall Street Journal in 1995 to assess the degree of economic freedom globally. The index scores nations on 10 broad factors of economic freedom using statistics from organizations like The World Bank, the International Monetary Fund (IMF) and the Economic Intelligence. The 10 factors presented below are averaged equally into a total score. Each one of the 10 freedoms is graded using a scale from 0 to 100, where 100 represent the maximum freedom. A score of 100 signifies an economic environment or set of policies that is most conducive to economic freedom. Trade Freedom: Trade freedom is a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services. Different imports entering a country can, and often do, face different tariffs. Monetary Freedom: Monetary freedom combines a measure of price stability with an assessment of price controls. Both inflation and price controls distort market activity. Price stability without microeconomic intervention is the ideal state for the free market. 14

15 Government Size/Spending: This component considers the level of government expenditures as a percentage of GDP. Government expenditures, including consumption and transfers, account for the entire score. Fiscal Freedom: Fiscal freedom is a measure of the tax burden imposed by government. Property Rights: The property rights component is an assessment of the ability of individuals to accumulate private property, secured by clear laws that are fully enforced by the state. Investment Freedom: In an economically free country, there would be no constraints on the flow of investment capital. Individuals and firms would be allowed to move their resources into and out of specific activities internally and across the country s borders without restriction. Financial Freedom: Financial freedom is a measure of banking efficiency as well as a measure of independence from government control and interference in the financial sector. Freedom from Corruption: Corruption erodes economic freedom by introducing insecurity and uncertainty into economic relationships. The higher the level of corruption, the lower the level of overall economic freedom and the lower a country s score. Labor Freedom: The labor freedom component is a quantitative measure that looks into aspects of the legal and regulatory framework of a country s labor market. The Index of Economic of selected countries in Africa with a particular focus on the ECOWAS nations in comparison with other nations of the world is presented in Table 7. Basically the ranking is done based on the following classification: Free (80-100), Mostly Free ( ),Moderately Free ( ),Mostly Un-free ( ), Repressed (0-49.9). The index of economic freedom and the subsequent ranking revealed that all the countries in ECOWAS can be described as relatively close economies compared with countries such as Hog Kong with economic freedom score of 89.3 in 2013, making its economy the 1th freest in the 2013 Index. Nigeria, the largest country in Africa has an economic freedom score of 55.1 in 2013, making its economy the 120 th freest in world in In accordance with the speculation of Miller and Holmes (2011), the loss of economic freedom hits the poor especially hard. Over the past decade, countries that increased economic freedom saw poverty levels fall almost twice as much as countries that lost freedom. People in countries 15

16 with more economic freedom were not only happier, but more prosperous. The correlation between economic freedom and prosperity is stunningly high, with more freedom translating to greater per capita income. Thus one of the major impediments to intra-african trade often overlooked or underrated could be deduce from the low economic freedom reveal in Table 2. Table 7: Index of Economic Freedom ECOWAS Countries Countries Rank Score Change Rank Score Change Benin Burkina Faso Cape Verde Code D Ivoire Gambia Ghana Guinea Guinea Bissau Liberia Mali Niger Nigeria Senegal Sierra Leone Togo Selected Developed Countries Hong Kong Canada United States United Kingdom Japan Source: Gwartney et al., (2012) Table 8: Principal Trade Partners of ECOWAS Members by Country Country Major Exporters Major Importers Benin China, India, Brazil, Nigeria*, Indonesia France, China, Cote d Ivoire*, United Kingdom (U.K), Ghana* Burkina-Faso Switzerland, France, Belgium, Cote d Ivoire*, France, China, USA, India Luxembourg, Singapore, Cote d Ivoire Cape Verde Portugal, Spain, United States (US), Portugal, Netherland, Spain, Brazil, Italy Morocco, France Cote d Ivoire France, Netherland, U.S.A., Nigeria*, Nigeria*, France, China, Germany, USA Italy Gambia Senegal, U.K, Guinea, France, Guinea- Bissau* Ghana Netherlands, UK, France, US, Germany China, Nigeria*, US, UK, India China, Senegal*, Brazil, Cote d Ivoire*, Netherlands 16

17 Guinea East, Southern and North Africa, Europe, Europe, EU, North America, Cote d Ivoire China Guinea India, Singapore, China Senegal*, Portugal, China, France, India Bissau Liberia Germany, Bangladesh, Poland, US, Korea Rep., Singapore, Japan, China, Germany Belgium Mali Switzerland, South-Africa, Senegal*, France, Senegal, Cote d Ivoire*, Togo*, Cote d Ivoire*, China Benin* Niger France, Nigeria*, US, Japan, Switzerland France, China, US, Nigeria*, Cote d Ivoire* Nigeria USA, Brazil, Spain, France, Japan USA, UK, Germany, Japan, France Senegal Mali*, India, France, Italy, Spain France, Nigeria*, Thailand, China, Spain Sierra Leone Belgium, France, US, Germany, India Germany, UK, Cote d Ivoire*, US, China Togo Benin*, Burkina-Faso*, Ghana*, Germany, Netherlands, Italy, France, Cote Netherlands d Ivoire* Source: Africa Trade Statistics, Brief Empirical Literature Review Starting with Tinbergen (1962), the gravity model has given rise to literally thousands of publications and working papers covering a wide variety of regions, time periods, and sectors. The gravity model is a key tool for researchers interested in the effects of traderelated policies. The focus of the present paper is to apply the gravity model to examine the effect of regional integration on intra African trade. Accordingly, this study fitted a gravity model to see if conventional determinants of bilateral trade flows are relevant in Africa and evaluate the impact of regional groupings. Viner (1950) assesses the welfare effect of an RTA by using the basic gravity model where trade between two countries depends on their size (GDP, population, land area) and on transaction costs (distance, cultural similarities). Balassa (1967) in turn, proposed a gross trade creation measure as a computable version of Viner s trade creation and trade diversion notions while Aitken (1973) formulated a gravity model including RTA dummy variables to estimate Balassa s measures. Computable General Equilibrium (CGE) models and gravity models are the two major classes of quantitative tools that are popularly used to analyse the impact of policies on economic outcomes. Iqbal & Khan (2002) uses two methods of measuring the impact of ECOWAS on intraregional trade: the trade ratio, a measure of the share of intraregional trade in total trade show and the gravity model, a measure of trade between two countries. Results from both 17

18 methods show a lack of significant increase in intraregional trade between the Western African nations. Likewise, using the trade ratio method, Torre and Kelly (1992), and Foroutan (1992) discover that such regional efforts have not significantly affected intraregional trade. They conclude that the share of intraregional trade flows of the member states of ECOWAS is small (in all cases, below 10% ) and at best stagnant. More studies from Ogunkola (1994) and Rose (1997) come to similar conclusion on the non-significant effect of regional integration on trade between member countries of ECOWAS. Ogunkola (1998) compares a pre-integration period ( ) to a post-integration period ( ) and finds that intra-trade between ECOWAS member states remained weak during these periods Similarly, Batra (2004) analysed India s global trade potentials using gravity model. The augmented gravity model was first used to analyse the world trade flows and the coefficients thus obtained are then used to predict trade potential for India. The gravity model was estimated using the OLS techniques with cross-section data for the year The dependent variables in all the tests are merchandise trade (exports and imports in US dollars), in log form, between pairs of countries Analytical Framework and Estimation Techniques 3.1. The Gravity Model It has been known since the seminal work of Tinbergen (1962) that the size of bilateral trade flows between any two countries can be approximated by a law called the gravity equation by analogy with the Newtonian theory of gravitation. The gravity model of bilateral trade is the workhorse model for the empirical analysis of bilateral trade patterns (Eichengreen and Irwin, 1998). A particular application of the gravity model is to explain and predict the effects of Free Trade Agreements on trade flows ( Baier and Bergsrtand, 2007). The gravity model postulates that bilateral trade flows are proportional to the product of the size of the two economies, and inversely related to the distance between them. This model describes the volume of bilateral trade as a function of economic size of origin and destination, and transactional distance between them. This study adopted the gravity model described as a work-horse of international trade analysis. Tinbergen (1962) and Poyhonen (1963) first applied the gravity model to analyze 18

19 international trade flows between European countries, and later Anderson (1979), Bergstrand (1985) and Sanso et al. (1993). Since then, numerous empirical studies applied gravity model to inspect the trade creation and trade diversion effects of the RTAs. Based on the traditional concept of gravity model bilateral trade can be explained by GDP and GDP per capita and both trade impediment (distance) and preference factors (common border, common language, etc. According to this model, flows of export/import between two countries are explained by their economic sizes (GDP or GNP), population and direct geographical distances between the countries. Several studies have also adopted the gravity model to assess the performance of regional blocks in Africa. Notable among such studies are those of Foroutan and Pritchett (1993), Ogunkola (1994), Elbadawi (1997), Lyakurwa (1997) and Longo and Sekkat (2000). The model is written in log form as follows: log( E ) log( Y ) log( Y ) log( D ) 1 ij 0 1 i 2 j 3 ij According to Tinbergen (1962), the GDP/GNP is used in the gravity model due to the fact that the economic size of the exporting country has a lot of influence on the quantity of goods produced, in the same vein, the size of the importing county s market will also determine the quantity of goods the exporting country can sell. In addition, the volume of goods traded depends on the cost of transportation; this is usually proxied by geographic distance between the two countries. Linnemann (1966), expanded the model by introducing a population variable, thus taking into consideration the economies of scale. Thus can rewrite the equation as follows: log( E ) log( Y ) log( P ) log( Y ) log( P ) log( D ) ( ECOWAS ) 2 ijt 0 1 it 2 it 3 jt 4 jt 5 ij 6 ij ij Where P is the population variable, D ij is the distance between two countries and it provide a good proxy for transportation cost ECOWAS is a dummy variable that represents the preferential trade agreement and it is denoted by one if the two countries are members of ECOWAS and zero otherwise. E ij is the export from country I to j. According to Sharma and Chua (2010), GDP per capita provides a good proxy for the level of development and infrastructures that are necessary to conduct trade, hence it was also included in the model to give equation (3): log( E ) log( Y ) log( P ) log( Y ) log( P ) log( D ) ( ECOWAS ) ijt 0 1 it 2 it 3 jt 4 jt 5 ij 6 ij 19

20 Y Y + jt 7 log it P 8 ij it P jt 3 Other variables such as common border, common language, colonial ruler, landlocked common currency were also included in equation (4) as dummy variables to capture their effects on bilateral trade among the selected countries. Thus the final equation estimated is given below log( E ) log( Y ) log( P ) log( Y ) log( P ) log( D ) ( ECOWAS ) ijt 0 1 it 2 jt 3 jt 4 jt 5 ij 6 ij Y Y + jt 7 log it P 8 ij it P jt WAEMU ij ComB ij comlang ij landlc ij comcur ij coltie ij 4 Traditionally, the gravity model has been estimated by OLS regression. However, in large networks data often consists of zero flows between some nodes. Zero flows are not easily handled with OLS estimation. The OLS estimation of the gravity model can be termed to be inconsistent and inefficient when considering the ideas of Silva and Tenreyro (2006). In other words, the censored nature of bilateral trade implies that OLS estimates are biased. Thus, the above model is estimated using a tobit formulation (see Longo and Sekkat 2001, Elbadawi, 1997, Forotutan and Prichett 1993). Let the latent variable be given by log Yi ' X ij ; then 5 Prob( y 0) Prob( ' X ) (1 F ) i i i 2 f ( yi ' X i, Pr ob( yi 0) f ( yi yi 0 F i Fi e 1 ( y ' ) 1 2 i X 2 2 The log-likelihood function of this can be given by, log L log(1 F ) log( ) ( y ' X ) i 2 2 y 0 y 0 2 y 0 2 u u 9 The Tobit model, is analysed by finding the estimates that maximized the likelihood function above. The gravity model was estimated both for bilateral exports only. The dependent variables is export of the ECOWAS member countries. i 2 20

21 4.0. Data and Descriptive Statistics The Economic Community of West African States (ECOWAS) which is the most broadlybased integration movement in the West Africa sub-region and its membership constitutes those of all the smaller movements. Although, there exist other regional integration arrangements which are subsets of the ECOWAS, but, for the purpose of this study, ECOWAS is mainly focused on. The selection is justified on the ground that it forms a good representative of the trade blocs in Africa and of course they provide a relatively heterogeneous group of trade blocs. This study used both panel and cross-sectional analyses based on data on bilateral trade flows Between ECOWAS member countries and its main trading partners, the two countries GDPs and distance from one another. Although the standard gravity equation considers every possible bilateral trade flow between all the possible pairings, we tried to confine the dependent variables to bilateral trade flows between three selected countries and each of its trading partners in order to analyse individual countries trade patterns. This method was previously utilized by Wall (1999) in modelling his gravity equation to analyse U.S. trade pattern. Although the data set was limited by the amount of information available, we tried to select, all countries in Africa that would well represent the bilateral trade flows with the ECOWAS member countries Variables included in the gravity model: The variable included in the gravity model, the definition and the a prior expectation is presented in Table 9 (Appendix). The dependent variable is total bilateral trade measured in term of exports. Eijt is total annual merchandise exports in million dollars from country i to j at time t. The use of exports as measure of bilateral trade is to account for the fact most importers especially in these African blocs tend to deliberately underreport their imports as means to avoiding excessive import duties as indicated by Baldwin and Taglioni (2006). The literature points out a number of factors that influence (regional) trade. Typically, empirical studies proxy trade costs with bilateral distance. The dynamic determinants of trade that are amendable to policy intervention are economic size measured by GDP, population or income per capita to proxy for demand. Others are referred to as fixed factors and include country characteristics like common border, common currency, common language and common colonial ruler. However, a number of additional variables are also customarily used. These include dummies for landlocked countries and common borders. They are used to 21

22 reflect the hypotheses that transport costs increase with distance and that they are higher for landlocked countries and islands but are lower for neighbouring countries. Dummies for common language, adjacency or other relevant cultural features such as colonial history are used to capture information costs. Search costs are probably lower for trade between countries whose business practices, competitiveness and delivery reliability are well known to one another. Firms in adjacent countries, countries with a common language or other relevant cultural features are likely to know more about each other and to understand each other s business practices better than firms operating in less-similar environments. For this reason, firms are more likely to search for suppliers or customers in countries where the business environment is familiar to them A dummy variable is used to reveal the presence of membership in ECOWAS. The coefficient of this variable is a measure of the trade stimulating effect of the integration scheme. Since seven members of ECOWAS are also members of WAEMU, another dummy variable is specified to account for trade flows between ECOWAS member countries resulting from membership in WAEMU. Membership in WAEMU represents the single currency effect on bilateral trade between states in ECOWAS. ECOWAS1 is a dummy variable indicating membership of ECOWAS; it is equal to 1 if the importing and exporting countries are members and 0 if any of them is not Data Sources Estimation of a gravity equation requires data on a wide range of variables that influence trade. The relevant variables were drawn from the reach databases available on the internet. Bilateral trade flows was obtained from the IMF s DOTS, and UN, COMTRADE, Population was obtained from UNCTADSTAT. In a gravity model, trade flows are typically expressed in current international prices (dollars) and export statistics are generally preferred to import statistics. GDPs in current dollars, converted at current exchange rates was obtained from the IMF s International Financial Statistics (IFS) available online. This work treats a sample of 15 countries that made up of the ECOWAS. The information on distances was obtained from the web site: 22

23 5.0. Results and Discussion 5.1. Descriptive Analysis of Trade Related Variables-ECOWAS Member Countries The description of total merchandise trade- total export and import for each ECOWAS member countries for 2003 to 2012 is presented in Table 10 and 11. The analysis clearly reveals the low trade performances of these countries. Consequently, the trade flow of ECOWAS in relation to world trade flow is minimal, although it seems to be improving from 0.52% in year 2003 to 0.92% in Although this increase is still not relevant to the much anticipated growth in trade and it is an indication that Africa has not yet integrated to the global markets. Table 10 : Total Merchandise Trade Export and Import by ECOWAS Member Countries: Country Benin Burkina Faso Cape Verde Côte d'ivoire Equatorial Guinea Gambia Ghana Guinea Guinea-Bissau Liberia Mali Niger Nigeria Senegal Togo Ecowas World Africa % of Africa in World export % of EWOWAS in Africa Export % of ECOWAS in World export

24 Table 11: Total Merchandise Trade-Import by ECOWAS Member Countries: Country Benin Burkina Faso Cape Verde Côte d'ivoire Equatorial Guinea Gambia Ghana Guinea Guinea-Bissau Liberia Mali Niger Nigeria Senegal Togo ECOWAS Africa World % of ECOWAS in Africa Import % of ECOWAS in World Import % of Africa in World import Source: WTO Data base, Trade Performance of Some Selected Regional Economic Integrations The basic aim of RTAs is to enhance the integration of African countries into the global trade. However, despite the fact that RTAs influence trade flows among African countries, the full integration into the global trade is still a far cry. The performances of RTAS in Africa is still very low.the percentage contribution of the RTAS in Africa to global trade is highly negligible as shown in Table 12. The percentage of COMESA, EAC, ECOWAS and MRU to total world export is , , and , respectively. This is a far cry from the contribution of RTAS in developed countries. For instance the contribution of EU27 is %. The same trend is observed for imports. On the overall, Africa contribution to world trade in general is still low and in particular the contribution of the RTAs in Africa to world trade flows is low. This reveals that RTAs in developed countries are doing exceedingly great than their counterparts in the developing countries. Therefore, the fundamental issues that prevent the effective performances of the RTAs in Africa in particularly need to be identified and addressed. Table 12: Trade Performance of Some Selected Regional Economic Integrations Economy Export % of world Import % of World Africa (Excluding South Africa) Sub-Saharan Africa (Excluding South Africa COMESA EAC ECOWAS