Third, financial development is positively related to trade in the sub-region, as it helps in the efficient financial intermediation, mobilization, and channeling of credit to the tradeable sectors of the economy, with the consequence of greater trade in the sub-region. It is, therefore, necessary that strong monetary, regulatory, and supervisory policy/ frameworks be implemented to steer the development of the financial sector towards promoting trade in the sub-region. Fourth, the findings show that a good trade environment brought about by better trade policies, and regulatory and institutional framework encourages trade. The implication is that improvements in the regulatory, policy, and institutional frameworks are needed to steer trade in the WMAZ Sub-region. Fifth, the results indicate that a competitive exchange rate is necessary to trade in the sub-region. Thus, there is a need for the adoption and implementation of sound, stable, and competitive exchange rate macroeconomic policies that will greatly promote trade in the sub-region. Finally, the findings show that national income is an important determinant of tradeflows in the WAMZ sub-region. By implication, policies to increase national income growth capacity, particularly through economic diversification should be implemented in the sub-region.
This paper investigates the relationship between monetary integration, foreign direct investment (FDI) and trade in the WestAfricanMonetaryZone (WAMZ) using annual time series for the period 1980e2013. It also examines whether trade and FDI are complement or substitute. Several econometric models are applied including Ordinary Least Squares (OLS) and fully-modified OLS (FMOLS). Our empirical results revealed that FDI flows into the WAMZ is influence positively by monetary integration. The findings also suggest that while real GDP, large population size and greater distance positively influence FDI flows, weak economic freedom index negatively impact FDI flows into the zone. The results support the argument that monetary union positively affect trade. Our empirical finding support the hypothesis that FDI and tradeflows are complementary. The results are in line with earlier research findings. Therefore, any policy that promotes trade such as monetary integration enhances FDI inflows as well. The findings offer perspectives and insight for a new policy in WAMZ economies in their drive to attain sustainable economic growth.
The law of one price (LOOP) states that once the price of a traded good is expressed in a common currency, the good should sell for the same price in different countries. The intu- ition is that, in perfectly integrated international markets, free trade in goods will arbitrage away price differentials across countries. Traditionally, the size of observed bilateral tradeflows has been used as the metric to gauge the actual degree of goods’ market integration - or its absence, the degree of market segmentation. The size of deviations from the LOOP provides an alternative measure. There are two commonly cited sources of goods market segmentation that give rise to LOOP deviations; first, the costs of international transactions or barriers to trade and, second, the prevalence of non-traded input costs of distributing and retailing traded goods in local markets. Eaton and Kortum (2002) develop a multi-country Ricardian model to estimate internationaltrade barriers, or tradecosts , by using data on observed bilateral trade volumes. Alvarez and Lucas (2007) use estimates of tradecosts to explain the observed inverse relationship between trade to GDP ratio and size of a country. This paper explores whether a multi-country Ricardian model, in which bilateral tradecosts and local costs of distribution are carefully calibrated, can quantitatively account for the distribution of observed, good by good LOOP deviations.
On the effect of remittances on growth, Fayissa and Nsiah (2008) found that remittances promote growth in countries where the level of financial system development is low by providing an alternative source of finance for investment thereby helping the economy overcome liquidity constraints. Jongwanich (2007) in a related study comprising of Developing Asia and Pacific Countries found that remittances have a marginal impact on economic growth but the effect of remittances on poverty reduction was found to be significant. Ncube and Brixiova (2013) also found that remittances impact positively on public debt sustainability in Africa. Clemens and Mckenzie (2014) concluded that remittances have a first-order effect on poverty reduction and welfare in the country of origin as well as on the global GDP, but its effect on the economic growth of the country of origin is elusive. Meyer and Shera (2016) in a similar study opined that remittances have a positive impact on growth and that the impact tends to improve at a higher level of remittances relative to GDP. Salahuddin and Gow (2015) found that remittances have a highly significant and positive impact on economic growth. Balde (2009) concluded that remittances do not have a direct positive impact on growth in SSA instead it has an indirect effect on growth through various channels like investment or education. El Hamma (2016) in a similar study examined the relationship between remittances and financial sector development in selected Middle East and North African countries for a period of 1984 to 2012 and found that the effect of remittances on economic growth is affected by the level of financial sector development. Agu (2009) opined that there is a very weak relationship between remittances and the real sector of the Nigerian economy, but relatively significant on the private consumption.
The issues relating to the costs and benefits of monetary union emanates from the OCA theory due to Mundel (1961), McKinnon (1963), Kenen (1969) and Ingram (1972). The theory espouses the conditions under which a region or group of countries qualify as an optimum currency area as basis for assessing the expected net-benefit of monetary union. An optimum currency area is defined as a group of countries with economies closely linked by trade in goods and services and by factor mobility (Krugman and Obstfeld, 2000). Thus, such group of countries or region may have similar economic structure and symmetric shocks simultaneously. In such arrangement, a common currency may become optimal for the entire region. The optimality of this theory is viewed as a case where the costs of relinquishing exchange rate as an internal instrument of adjustment are outweighed by the benefits of adopting a single currency or a fixed exchange rate regime (Ricci, 2008). Mundell (1961) proposed a simple idea to determine whether it can be costly or beneficial for countries in a region to create a common monetary area. He argued that fixed exchange rate among countries of a region could produce better results than the flexible exchange rate if they posses common characteristics. He maintained that when factor (labor) mobility that permits large fiscal transfer is present across a region, as well as the existence of flexible wage and prices among economies, asymmetric shocks would reduce in that region. Accordingly, countries could afford to lose their exchange rates as a tool of adjustment because exchange rate plays a passive role when a region is faced with symmetric shocks. McKinnon (1963) asserted that the more open the economy, the less the effectiveness of exchange rate as an adjustment instrument for correcting external imbalances. According to his reasoning, open economy bears close link with the law of purchasing power parity (PPP), indicating that exchange rate would affect most prices the same way and may not be able to generate the changes sought in relative prices. Kenen (1969) argued that the more diversified the production structure of a country, the less the likelihood of asymmetric shocks and the less important it is to depend on exchange rate in adjustments during recession period.
Ironically, the magnitude of the gains from exchange rates devaluation depended to a large extent on the foreign resource content of the exports. For primary agricultural exports emanating from existing plantations, especially in the case of cocoa, coffee and palm kernel that have high domestic resource content, devaluation enhanced their nominal export values. However, for grains and livestock production, which requires imported raw materials and feeds, devaluation helps to increase production costs and make the enterprise less competitive. It is quite apparent that devaluation helps to accentuate the implicit bias in protection against these sectors with low export potential but requiring very high foreign resource content for sustainability. This problem is more apparent for protected import substitution industries in these countries that were largely the appendage of multi-national corporations. Devaluation translated into increased cost of production, and the national appendages became quite uneconomical to operate. Most of them closed shops, and the anticipated gains from technological transfer foreclosed, primarily because of increased costs of production which followed devaluation.
The law of one price (LOOP) states that once the price of a traded good is expressed in a common currency, the good should sell for the same price in different countries. The intu- ition is that, in perfectly integrated international markets, free trade in goods will arbitrage away price differentials across countries. Traditionally, the size of observed bilateral tradeflows has been used as the metric to gauge the actual degree of goods’ market integration - or its absence, the degree of market segmentation. The size of deviations from the LOOP provides an alternative measure. There are two commonly cited sources of goods market segmentation that give rise to LOOP deviations; first, the costs of international transactions or barriers to trade and, second, the prevalence of non-traded input costs of distributing and retailing traded goods in local markets. ? develop a multi-country Ricardian model to esti- mate internationaltrade barriers, or tradecosts , by using data on observed bilateral trade volumes. ? use estimates of tradecosts to explain the observed inverse relationship between trade to GDP ratio and size of a country. This paper explores whether a multi-country Ricardian model, in which bilateral tradecosts and local costs of distribution are carefully calibrated, can quantitatively account for the distribution of observed, good by good LOOP deviations.
The findings of this study indicated internal validity on the basis that strong financial sector of the WAMZ economies and the index of trade volume as the basic components of regional integration are sacrosanct to high volume of economic growth within the region. The basic findings revealed weak link among financial and trade indexes and economic growth in the WAMZ economies. The implications call for short term economic plans and policies in the WAMZ economies so as to collectively monitor economic policies and growth. WAMZ economies promptly follow liberal import policy that is demand-leading hypothesis. Therefore, this work pinpointed that the sampled economies in the WAMZ exhibit heterogeneous relationship making it difficult for economic integration within the WAMZ economies to support intensive growth. Based on the foregoing, WAMZ economies should support more aggressive financial liberalisation policies so as to allow financial flows and output as the financial integration co-efficient support growth in both the static and dynamic models. We argued that the other sampled economies within the WAMZ to understudy the financial market arrangement in Nigeria and Ghana, in other to improve their financial market and encourage regional economic integration as well as total output in the zone. It is paramount to set financial service authority (or strengthen the existing once, e.g. WAIFEM through legislative engagement) that monitors the actions of the financial institutions and as well provide the needed information that facilitates robust and sound regional financial and economic integrations and outputs. This will encourage and improve the activities of the economies to enhance outputs more especially in this period of epidemic and global economic crises. Also the need to limit imports and encourage export through import substitution strategies or quota or outright bound on some selected commodities. In this regards, Africa countries have nothing to lose since their exports are mostly primary commodities which elasticity depicts to be demand necessities. The study urges countries in the WAMZ to discourage the imports of primary (Agricultural Produce-Rice) goods. Thus, our basic postulations are inter-policy approach on social, political and economic arrangements that will neutralize the heterogeneity and foster institutional and attitudinal reforms, eliminate insecurity challenges, and spur political stability and responsible leaderships.
This hypothesis based upon Krugman (1993) and Krugman and Venables (1996)) is rooted in trade theory that a single currency will allow for the exploitation of economies of scale, and the new literature on economic geography, that postulates a U-shaped relation between integration and geographic concentration. In this literature, very high and very low trading costs favour dispersion of production. When trading costs fall and obstacles to trade fade, firms will be encouraged to exploit increasing returns by relocating and thereby altering the industrial structure. Krugman (1991a), (1991b), and (1992), Bertola (1993), and Rauch (1994) argue that at this stage any external economy leading to increasing return will produce a concentration of some industries in any country that enjoys even a small advantage over the others. To the extent that monetary integration might expedite industry concentration and eventually national specialization, a “common” shock to a specific sector or industry will asymmetrically affect the countries in which that industry is located. Kalemli-Ozcan, Sørensen and Yosha (2001a) provide empirical evidence that private risk sharing enhances specialization in production. More integrated, inter-regional and international financial markets allow regions and countries to insure against idiosyncratic shocks, permitting them to reap the gains from specialization. “The single currency will not affect other trading costs such as differences in conventions, languages, and legal systems. According to Bertola (1993): "at the theoretical level, if increasing returns to scale are as important as recent models of endogenous growth suggest, and if they may be exploited along geographical dimensions as well as over time, then removal of obstacles to factor reallocation may well lead to concentration of production and growth in privileged regions.… .Geographic concentration of production and growth may indeed be necessary to exploit the scale economies made possible by economic integration".
The natural logarithm of monthly data on inflation which was proxied by the consumer price index (CPI) and nominal exchange rates with the US dollar for the six countries were taken. The data period for CPI was from 2006M01 to 2017M05 while the data period for nominal exchange rate was from 1985M01 to 2017M05. The data was obtained from the International Financial Statistics (IFS) of the InternationalMonetary Fund (IMF).
constitute the demand of resident particular people such as households, private persons, organizations and professionals (Thioune, 2015). Since then, analysis about electricity demand is at the chore of energetic debates all around the world and interest a great number of economists. Those latter seek generally to analyze the determining elements of electricity demand or the energetic efficiency; to find the optimal price scale in the electricity domain and to analyze the link that exists between electricity consumption and economic growth. If the consumption of electric energy represents so much interest in economic analysis, that is surely because of its great importance in the world development process since the industrial revolution at the end of the eighteenth century. In fact, the industrial revolution is characterized by a tremendous acceleration of the economic growth, the consumption rate and so on. Those facts deeply overwhelm Western Europe countries (Thioune, 2015). According to Hounkpatin (2013) the available electric energy in sufficient quantity and quality in a given country constitute a determinant factor of its economic and social development; it brings comfort and well-being in households, favors the artisanal development of Small and Medium size Business (SMB) and industries. It also favors the development of administration services along with agriculture and that all allowing a very interesting economic growth of the country in balance with its population growth. Unfortunately, it is evident enough to remark that until today, access to electricity remains a major problem in Africa, though the continent overflows with enormous potentials in natural resources. A survey from the African Development Bank (ADB) shows that around 39% of total energy consumed in sub-Saharan Africa is imported against 19% of world average (African Development Bank Group, 2006) Moreover, sub-Saharan Africa has got the world lowest electrification rate with only 26% International Energy Agency (IEA) (2006) and Wolde-Rufael (2009). Especially in West Africa, just as agricultural raw products, energetic resources are very abundant and they should have been contributing to the improvement of people’s well-being. Among those resources we can quote petrol, natural gas, an excellent potential in hydraulic, solar and wind-powered energies. That is what is called mix-energetic.
In addition, the degree of international financial integration in the WAEMU zone is 1.11 which is lower than the Non-UEMOA zone which the degree is 1.21. The average comparison test shows that the difference is significant. According to the theory, we expected that the WAEMU zone will be more financially open than the Non-WAEMU zone because the single currency is perceived by economic actors as a strong act, a lasting commitment because it excludes any possibility of competitive devaluation in the future. The result is an increase in foreign direct investment, a strengthening of economic and financial integration. However, the weakness of international financial integration in the WAEMU zone can be explained by the fact that financial integration was an integral part of the regional economic integration program with a view to creating a single currency in the Non-WAEMU 5 zone compared to WAEMU. As bilateral trade, we believe that international financial integration has a positive effect on the synchronization of business cycles. Greater financial links can increase the synchronization of business cycles. In fact, a shock that affects a country does not remain at the national level. It spreads abroad because the national agents recall the foreign assets to face the constraint (Dedola and Lombardo, 2012; Kalemli-Ozcan et al. 2013b).
study lacked a theoretical foundation in the gravity equation. They explored the potential impediments which were considered as the main trade barriers. These are: (i) bilateral trade barriers, (ii) exporters resistance to trade with all regions, and (iii) importers resistance to trade with all regions. They modified the constant elasticity of substitution (CES) expenditure function as in Anderson (1979) in order to obtain a simpler version of the gravity model. A crucial difference between their analysis and McCallum‟s (1995) analysis was that they found a substantial reduction (about 44 percent) of trade among United States of America and Canada because of the border effects between the two countries, instead of the 19 percent change of the McCallum‟s findings. They therefore concluded that, trade barriers established on the borders seemed to diminish the trade flow between United States and Canada. Based on a constant elasticity of substitution (CES) system, Anderson and van Wincoop (2003) used a Non-linear Least Squares (NLS) model considering the endogeneity of tradecosts to refine the theoretical foundations of the gravity model and provided evidence of border effects on trade. They indicated that the costs of bilateral trade between two countries are affected not only by bilateral tradecosts such as distance, being landlocked, a common border and language; but also by the relative weight of these tradecosts in comparison to trading partners in the rest of the world. What they termed as the „multilateral resistance‟. Anderson and van Wincoop (2003) pointed out that multilateral resistance factors should be taken into account in empirical research in order to avoid a biased estimation of the model parameters. In the same vein, Matyas (1997) proposed that bilateral tradeflows should be estimated as a three-way specification including time effects and exporter and importer fixed effects in order to avoid inconsistent modelling results caused by unobserved variation.
The high and rising level of tradecosts has generated intense academic and policy interest on the level and its impact on tradeflows and economic integration. Higher tradecosts are an obstacle to trade and impede the reali- zation of gains fromtrade liberalization (see De ). Indeed, the internationaltrade literature is replete with studies on the impact of tradecosts on the volume of trade (see for example Anderson and van Wincoop ). Regional integration is also seen as the resultant of re- duced costs of transportation in particular and other in- frastructure services in general (Khan and Weiss ). Commitment towards removal of trade barriers as well as initiatives to have fair assessment about the size and shape of tradecosts among countries would definitely strengthen economic integration process. Thus, reducing internationaltradecosts and hence improving trade competitiveness would have a very significant impact on intra-regional trade. It is therefore unsurprising that trade facilitation and trade cost reduction programs or targets form important component of bilateral or regional trade and economic integration initiatives.
Human capital is the main source of growth in several endogenous growth models as well as one of the key extensions of the neoclassical growth model. Nelson and Phelps (1966) suggest that a large sized labour force makes it easier for a country to absorb new products or ideas that have been discovered elsewhere. Romer (1990) states that quality development of labour force generates new products or ideas that underlie technological progress. He also notes that those countries with a large and well developed labour force experience a more rapid rate of introduction of new goods and thereby tend to grow faster. A large number of studies has found evidence suggesting that educated population is key determinant of economic growth (see Barro, 1991; Mankiw et al, 1992; Barro and Sala-i-Martin, 1995; Brunetti et al, 1998, Hanushek and Kimko, 2000). However, there have been other scholars who have questioned these findings and, consequently, the importance of human capital as substantial determinant of economic growth (e.g. Levine and Renelt, 1992; Benhabib and Spiegel, 1994; Topel, 1999; Krueger and Lindahl, 2001; Pritchett, 2001).
The Werner Report, published in October of 1970, accompanied by an increased move towards an international system of flexible exchange rates during the early 1970’s, gave increased impetus to a more rigorous theoretical dialogue, termed by Mongelli (2002) as the “cost-benefit phase” subsequent to the “pioneering phase” of OCA theory seen above. Work by Corden (1972), Ishiyama (1975) and Tower and Willett (1976) are said to characterise this phase, with a greater emphasis of weighing the specific pros and cons of monetary integration in comparison with other exchange rate arrangements, occasionally with particular reference to the European Project. Whilst the work reviewed above tended to give vague indications of when monetary integration would be most beneficial, or more accurately when the loss of exchange rate controls would be less detrimental, the “cost-benefit” type analysis sought to clarify the varying costs and expand on the benefits discussed in previous work. I shall not discuss these contributions in any detail, but will indicate where they have enhanced or changed the dominant view on optimal currency areas.
West Africa has another large economic bloc, WAE- MU, a monetary union made up of 50% of the region’s countries that does not significantly affect their global agricultural international transactions, cmo. However, it is a major determinant of the region’s internal tradeflows, as will be discussed later. Monetary union raises tradeflows between countries in the community by reducing transaction costs using a common currency and eliminating risks associated with exchange rate volatility (Carrère, 2004; Masson, Pattillo, 2004). But the result confirms that the global international transac- tions of WAEMU countries are not different from those of other ECOWAS member countries. One justification for this result lies in the composition of the internation- al agricultural trade baskets of countries in the region and their directions. The largest share of these transac- tions is made up of outgoing raw materials and incom- ing finished products from countries with an advanced level of agricultural development outside West Africa, as pointed out by Torres and Van Seters (2016). This is a condition that dictates the behavioral pattern of glob-
countries. Indeed, rather than promote growth, it was a source of stagnation. It also confirms that there appear to be a two quarters lag in monetary policy transmission effect with regard to real sector output. This is most worrisome when we realize that the coefficient estimate of the CG variable (at level) affects instantaneously real output negatively, a situation that is only moderated with a two-period lag (CG(-2)). The net effect sufficiently dampens the positive effects of CP(-1) variable, confirming the theoretical expectation of the crowding out effect of credit to government in these countries. Interestingly on the aggregate, the Log(EXR(-2) of the pooled regression model has a positive sign, suggesting that a two period lag positive transmission effect of exchange rate policy on real domestic output. As can be seen from Table 1, this outcome must have been induced by developments in Guinea (on current basis) and Sierra Leone (a two period lag log linear) cross-sectional data for the group, that show very strong positive relationship between exchange rates and real output, which sufficiently reversed the negative trends for all the other countries in the
We first estimate error-correction export demand model (2) using quarterly data, mostly over 1971Q1-2015Q4 with some exceptions noted in the Appendix. Our sample countries cannot be larger than twelve countries because of the dearth of quarterly trade data for other African countries. In estimating each model, we impose a maximum of 10 lags and use Akaike’s Information Criterion to select an optimum model. Since there are different critical values for different estimates and different diagnostic statistics, we collect them in the notes to each table and use them to identify a significant estimate by * and ** at the 10% and 5% level, respectively. The results from each optimum model are reported in Table 1. Note that due to volume of the results, while we report the short-run estimates only for exchange rate volatility in Panel A, long-run estimates attached to all variables are reported in Panel B. Finally diagnostics are reported in Panel C.
The main monetary policy objective in Nigeria is price stability and promoting non-inflation growth. The framework used to achieve this objective is monetary targeting, which involves setting aggregate money supply targets and reliance on Open Market Operations (OMO) and other policy instruments to achieve the target. In November, 2006, the MPC adopted the Interest Rate Corridor approach, which resulted in the replacement of the Minimum Rediscount Rate (MRR) by the Monetary Policy Rate (MPR). The new framework became necessary as the MRR proved not to be sufficiently responsive to CBN’s policy initiatives, especially in tackling the problem of excess liquidity in the system. The MPR determines the lower and upper band of the CBN standing facility and was intended as the nominal anchor for all other rates in the market. The MPC meets bi monthly to review developments in the economy.